BUSINESS DEVELOPMENT AND GROWTH
Building successful business ecosystems
Designing, building, configuring, fine-tuning, and managing a business ecosystem and platform through a 9-step approach
Today, all businesses depend on building the right ecosystems of partnerships to succeed, and that is why whether you are a startup or a multi-billion-dollar company, you need to understand how to build them as your business depends on them.
Business ecosystem: the definition
A business ecosystem is a set of companies with complementary and synergistic relationships that build strategic partnerships to deliver value for end-users or customers. These strategic partners can complement each other in different ways whether it be by directly supplying products to one another, or to combine products or services to provide a larger value-add, or finding better channels to reach a target or larger market. These combinations all build what we call a ‘business ecosystem’.
A good example of an ecosystem is the smartphone business ecosystem. Here we find several hardware and software manufacturers competing with one another vertically while complementing each other horizontally along the value chain to deliver economic value.
The foundations of a business ecosystem
Drivers of success
Every business combination, ecosystem, partnership, merger, or acquisition depends on three factors for success:
- Driver 1: all the companies together have to create more value than they could alone.
- Driver 2: the group needs to be managed so that it looks like one — which is hard to achieve especially in an ecosystem where a large number of companies are competing against one another
- Driver 3: the pie needs to be divided fairly which is very tricky because in an ecosystem everybody will be jockeying for position to get a little more for themselves.
An example of this is the IBM personal computer that was created many decades ago from a partnership between IBM, Intel, and Microsoft, and around that triad, several other companies joined the ecosystem over time, and together, the hardware, software, and application vendors created more value — Driver 1. While originally, IBM was the lead partner and orchestrated the industry trends, over time, both Intel and Microsoft gained power and became the driver of the ecosystem. But in all those years, they all worked towards a technological standard that kept them unified — Driver 2. In regards to the splitting of the pit, Intel and Microsoft earned a lot more than IBM over time because they developed a unique position in the ecosystem — Driver 3.
The building blocks
There are four core foundations of a business ecosystem:
- The type: whether it’s a product or a service, the overall system has to work well together
- The communication and collaboration platform: this could be a technology platform, where companies write the same code
- The network advantage: or the value-creating operational model. The key thing with any business ecosystem is that as it becomes larger and more diverse, it can compete better against other companies and other ecosystems, creating more value for its active members
- Division of equities: this determines who gets what out of the ecosystem and it also means each company has to capture enough value to make it worthwhile for them
Key considerations
Here is a checklist of things to consider when designing a business ecosystem:
- The why: 1) Why are partnerships needed? 2) How many are needed? 3)How do they add value? 4) What components are brought into the game by each partner? 5) How do the partners complement/complete each other? 6) What are the markets that are being served? 7) What complementarities are needed so that this ecosystem becomes productive
- The who: 1) Who should be in the ecosystem? 2) How should the due diligence of each partner be performed? 3) What assets will each bring? 4) Will it be easy to work with them in the ecosystem?
- The how: 1) How will the ecosystem be organized and structured? 2) How will the incentive structure get everyone working together?
- The growth: 1) How will growth be ignited? 2) How to bring attractive partners into the game early on so that others follow?
- The equity split: 1) Who gets paid what? 2) How will the partners split dividends? 3) How will value be exchanged?
Designing and managing a business ecosystem
There are nine-9 pillars for a successful business ecosystem of partnerships:
1. Scaling the number of partnerships
While a professional violinist or pianist can create great music individually, it can never create the value a team of attuned musicians or an orchestra can create as a team. With a business ecosystem, you also need to have the right players to create an advantage in the marketplace with components and partners working together and complementing each other. And this is where the ecosystem designer needs to think of the complementarities between the players. For example, a well-designed business ecosystem is the car industry value chain whereby several components go into a finished product with a large number of companies partnering to create more added value.
The more players within that ecosystem, the larger the value created and the larger the network advantage. For example, if you only have a few friends on Facebook, then it’s not that valuable, but the more there are, the more valuable it becomes. The same applies to Airbnb, Uber, Instagram, Amazon’s marketplace, etc. The more a business ecosystem scales, the more valuable it becomes.
Furthermore, take a telephone. If one has a telephone and nobody else has a telephone, it’s of zero value to them. However, when there are a million telephones as communication nodes on the network, this phone suddenly becomes much more valuable to its holder.
2. Partner selection
The combination of partners has to give the overall network a competitive edge in the marketplace. To select the right partner ask:
- What kind of partners do you need and why?
- What capabilities does each of the partners bring to the table?
- How will these partners interact with each other? What is the governance structure going to look like?
- How will these partners be attracted? What motivates them? In what order should they be onboarded?
3. Managing cooperation and competition
Within a large ecosystem with multiple players, it becomes complicated to manage internal competition and cooperation. To manage this:
- Operate under good partnership management principles — such as setting clear goals, constructing well-crafted contracts, good relationship management, good communication, and building trust
- Decide on the degree of exclusivity of the ecosystem early on — this can be key to making or breaking an ecosystem depending on the nature of its industry
- Think of how open or closed the ecosystem is going to be — for example, Apple’s OS is a closed ecosystem that creates a united and unique experience across the globe for its users, while the open Android ecosystem is different on various devices but has scaled to a larger proportion of the market, as Google is looking to gather user’s data
4. Organizing an ecosystem
A business ecosystem is not a random collection of firms and needs to be organized into groupings. There are three ways to organize an ecosystem:
- Around a common platform: this is a guideline that says who does what and who gets paid what with little room for flexibility in n
- Around a centrally managing organization: for example, in the airline constellation SkyTeam, there is a central organization that its members have relationships with one another and the role of this central organization is to orchestrate these relationships, lobby, and help them all get along
- Around a supply chain: in the car manufacturing industry, players are sitting on top of a large supply chain with varying tiers of suppliers, that supply components through subsystems that eventually get integrated into the final product
5. Building the sides
A business network can be a multi-sided platform, a key consideration when designing the network. There are three questions regarding the sides:
- How many sides does the network have? For example, Facebook and Twitter are one-sided platforms where users are on one side of the network, interacting with one another. Marketplaces such as eBay or Amazon are two-sided platforms with buyers and sellers. While Google is a three sides network with advertisers taking the third seat on the platform
- Where does the network advantage lie? Meaning, do we need more participants on one side of the network, more of the same, or do we need to scale all sides at once? For example, in the case of retail marketplaces such as eBay, there are many buyers and sellers, and the more buyers there are, the more sellers there would be, and vice versa. This same approach also works for logistics marketplaces such as Uber with its driver and commuter base
- What transactions are facilitated, or, where does the money flow? For example, on dating platforms, there aren’t any transactions after the communication is made between the sides while on retail marketplaces, the transaction only happens after the payment between sides has been made
6. Growing the ecosystem
Ecosystems either grow, or they die and for healthy growth, you need to think about the sequence in which that growth will take place.
- Who to invite first? When Apple launched the iPhone, it partnered with AT&T, to be its service provider. Thereafter, more players joined, and today it’s available on almost all other service providers
- Reorganize as it scales. In the case of Star Alliance, it started as a relatively small grouping, and over time grew to have more players with that, it realized that the initial foundation of one-firm-one-vote wasn’t sufficient to provide leadership, and so pivoted to a tiered structure of voting rights. Sometimes, you might even have to decide that certain partners don’t provide a good role anymore and prune the ecosystem out of change in vision or its demise
7. Launching and scaling a platform
There is always a chicken and egg problem at the start of any network or ecosystem and that network will only be valuable when there are players on it and players won’t come if it’s not valuable. But to ignite growth, any platform-based ecosystem needs to deliver a combination of value and players to scale.
Additionally, a platform’s charges and free giveaways need to be made clear as to how to create the right balance for healthy and prosperous growth. Too many free services will kill profits and too few will detract from development and customer engagement. The critical question here becomes: who subsidizes whom in this multi-sided platform? For example, Amazon subsidized the original book business and over time it started charging advertisers and others that needed to play on its network. It’s important to subsidize that side of the business that is hardest to get and then once you get them, they become attractors of the other side of the business ecosystem.
8. Sharing the profits
There are two parts to profit-sharing within a business ecosystem:
- What is the overall value created by the group: that depends on the network advantage within the marketplace — who’s in it, how well it’s organized, etc. — that creates the total value
- What is each player’s share of that total value: which will depend on the bargaining power of each player. For example, if there are many players of the same kind — e.g. on Amazon, there are +10,000 shoe vendors, hence their market is crowded — then they have very little bargaining power and vice versa.
These two factors tend to shit dynamically with time, so the value shares are not static, and very often, they’re not what was expected when the ecosystem initially started. So, when creating an ecosystem, think not just of the overall value but of how you will capture your share, and realize that this value might shift over time, so plan to stay on the right side of the value curve.
9. Competition
Within an ecosystem, it’s not one firm competing against another as in a traditional competition format but rather. it’s more a group of firms competing against another group and what matters is that this group is composed of the right players, is organized well, and has a strategy to compete against the other groups. Today, more and more, companies are getting together, cooperating in ecosystems and other kinds of partnerships to perhaps create more value and compete and disrupt traditional business models.
Sketching your ecosystem in action
Get your team in one room and put up a lot of whiteboards and sketch out your business’ ecosystem taking into account the position of your company, partners for supplies, partners for marketing, partners for complementary assets, etc. As you are drawing, step back and think about:
- Whether these are the right partners
- Whether your relationships are optimum
- Which ones are more important
- Which ones need nurturing
With these sketches and answering the questions above, you’re going to find out how you can create a competitive advantage from this group of partnerships because, in the overall market outlook, you’re your group versus the others. And how well you organize your ecosystem of businesses and partnerships is going to be the key to your overall success.
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