Discovering New Value
DEVELOPING YOUR ECOSYSTEM OPENS THE WAY TO CREATING more value for the customer than would be possible by any company acting alone outside an ecosystem. This ability of the ecosystem to generate additional value is critical to its success. As we mentioned in chapter 2, business ecosystems are less efficient than hierarchical organizations, but they make up for this efficiency gap by providing greater scope for joint learning, rapid innovation, and flexibility. This additional value is precisely what will pay for the additional cost that the ecosystem leader and partners will incur.
Potential Ecosystem Value Creation
What kind of additional value can an ecosystem create? We have observed four ways ecosystem strategies can unlock new value.
New Product Bundles
The bundles enable a product to deliver richer functionality to the customer. Apple’s iTunes Store and App Store, for instance, have given hardware products, such as an iPhone or an iPad, an almost infinite set of new functionalities by engaging millions of partners who create and offer music, video, and many different kinds of apps.
The ecosystem leader brings together and decides how to better combine a diverse range of capabilities from partners, kicking off an iterative learning cycle with lead customers, to more effectively satisfy customer needs. The case of Dassault Systèmes S.E. (DS) is an interesting example of how an ecosystem leader can bring together hundreds of knowledge partners to create ecosystems in automotive, life sciences, or aircraft design to support innovation. DS is an international software company headquartered in France with a turnover of $3.975 billion in 2017, and a market capitalization of more than $43 billion in early 2019.1 It started in the early eighties as a spin-off from the Dassault Aviation Company, a manufacturer of military aircraft and business jets such as the Falcon. It developed powerful computer-aided design (CAD) software for the aerospace industry. In its early days, it was among the pioneers in 3D modelling, and worked closely with its sister company Dassault Aviation. This gave it a good understanding of what was needed to design an aircraft. But its real breakthrough in that industry came in the nineties when it collaborated closely with Boeing to design the 777 aircraft, the first to be designed without producing a physical prototype. Opting for a purely virtual model to do all the testing before producing the first product required considerable know-how to flow from Boeing to DS. Even then, DS did not have all the technical expertise to model, for example, the aerodynamics of the plane. As often is the case, such specialized know-how rests with boutique companies that are masters of very specialized skills. DS went on to integrate these capabilities into what it dubbed the “CATIA 3DEXPERIENCE platform,” and developed a “virtual twin” of the product: a complete and detailed computer image of the physical product.
In developing solutions for other industries, DS always works very closely with a partner who has a deep understanding of that specific industry. In doing so, they develop new concepts that then can be applied to service the needs of other customers. For example, in the early 2000s, they worked with Toyota to understand how to integrate the virtual design of the product, the manufacturing process, the supply chain, and the after-sales service. This, in turn, led to the creation of the DS Product Lifecycle Management (PLM) system that enabled the integration of the design, development, manufacturing design, and administrative processes, such as documentation needed for certification in many other industries. This approach continues to serve DS well even today. In June 2018, for example, it announced a twenty-year partnership with EDF, the major French integrated electricity company, and Capgemini, a global consulting company, to digitize and modernize processes and engineering methods for the nuclear engineering industry.
In a similar way, DS works with industry leaders and hundreds of specialized expert companies in fields including mining, pharmaceuticals, marine engineering, fashion design, consumer products, energy, and cities. The concept of a virtual twin world has proven effective for many different applications. For instance, to produce a first virtual twin of a city, it worked closely with the National Research Foundation of Singapore, and many other government-linked organizations in Singapore to integrate urban planning, government services, energy supply, security, social integration, economic development, sustainability, access to health services, and so on. With images and data collected from these public agencies, including geometric, geospatial, and topological, as well as legacy and real-time data such as demographics, movement or climate, users of “Virtual Singapore,” a dynamic 3D city model and collaborative data platform, are able to create rich visual models and realistic large-scale simulations of Singapore. Users can then digitally explore the impact of urbanization on the city-state and develop solutions that optimize logistics, governance, and operations relating to environmental and disaster management, infrastructure, homeland security, or community services.
The choice to work with Singapore was not an accident. Bernard Charlès, president and CEO of Dassault Systèmes recalled:
Singapore is the most advanced city in the world in terms of leveraging technology to plan and manage its transformation over the next decades, and its government’s forward-thinking vision towards a Smart Nation parallels our own mission to harmonize product, nature and life through 3D universes. Cities are some of the most complex “products” created by humanity. Through more efficient and accurate predictions of future experiences within these cities using state-of-the-art tools and applications, we can better anticipate national resource planning or provision of services, and contribute towards a more sustainable quality of life. We hope to see other cities echo Singapore’s exciting initiative.2
The capability to create a virtual twin of a city has now enabled DS to work with several booming cities such as Jaipur in India to develop detailed 3D models for their urban development.
Using this approach, DS has catalyzed the development of a number of ecosystems with more than eight hundred partners, bringing together lead customers in industries ranging from automotive to life sciences, as well as dozens of services, software, and technology partners and educational institutions. Their ecosystems deliver a bundle of software solutions covering every aspect of PLM, from the first sketch of an idea to the documentation used in maintenance, optimized for each different industry’s needs. DS’s PLM ecosystems have enabled increased faster innovation, a wider set of solutions, and a lot more customization for the needs of its users, than DS could have managed alone. As Charlès put it, “As we are shifting towards an experience-centric world, the ecosystem and the combinative nature of creation are becoming more valuable than each individual piece of IP. While innovation is inseparable from the transmission of knowledge within an ecosystem, we have to find new models . . . with the right balance between individual contribution, investment and total value creation for the consumer and society.”3
New Platform Economies
Customers gain the benefits of innovative offerings, better value for money, more choice and less risk when a company establishes a platform and nurtures an ecosystem around it that opens up possibilities for partners and customers to share products, services, and knowledge. The most prominent examples of ecosystems built around platforms are two-sided markets, such as Uber, Lyft, Didi Chuxing, Grab, and Airbnb, which not only allow potential buyers and sellers to transact efficiently, but also enable efficient flows of information about needs and capacities between the parties and, of course, the ecosystem leader.
Ecosystem leaders can do more than simply set up an exchange to make the ecosystem successful. They need to find ways of attracting and nurturing potential partners and customers, monitoring the evolution and learning in the network, and catalyzing its development. But the possibilities for new value creation by harnessing platform economies is not restricted to establishing two-sided markets. As we have seen in the case of ARM, the firm has created value by establishing a platform in the form of its RISC-chip architecture, reducing the costs of designing and manufacturing these chips while speeding up innovation.
New Industries
The potential to create value sometimes entails creating a completely new industry, where companies that have never interacted before come together for the first time. Of course, a new market that brings them together can sometimes do the job. But, as we saw in chapter 2, a market is unlikely to be effective in promoting the kinds of knowledge exchange and co-learning required to build a new industry, especially when its future is shrouded in uncertainty. Creating the new mobility industry, for instance, will not just involve automotive companies. In fact, automakers may be one of the less important contributors. A new mobility industry will need infrastructure providers, designers and manufacturers of new types of sensors (both on-board and embedded in the environment), software and artificial intelligence (AI) companies, entertainment to occupy the passenger in an autonomous vehicle, and regulators and municipal governments, to name just a few of the likely participants. Hence, a new ecosystem that promotes experimentation and learning between the partners, and helps to coordinate their investments, is essential to unlock the enormous potential from tomorrow’s mobility solutions. For example, when Didi Chuxing Technology Co, the Chinese ride-sharing, AI, and autonomous technology conglomerate, announced in August 2018 that it would invest $1 billion in its auto-services business and break it off into a separate unit, it stated, “In the future, Didi will continue a win-win collaborative network with partners throughout the automotive industry chain to build a new transportation ecosystem designed for a future of shared mobility.”4
The Value-Creation Imperative
Creating the new value that ecosystem strategies can deliver by enabling new product bundles, new customer solutions, and new platform economies, and thus spawning new industries sounds attractive. But why is it becoming an imperative for more and more companies?
The answer lies in the fact that the global competitive environment is changing in ways that demand a much broader range of capabilities, and it offers new opportunities to engage with others. Three developments in the global environment are particularly significant in favoring ecosystem strategies: the fact that customers are increasingly demanding solutions and experiences rather than products, the rising knowledge content of many products and business activities, and new opportunities being created by advances in information and communications technologies.
Customers Are Demanding Solutions and Experiences
As we mentioned in chapter 2, customers are increasingly demanding solutions and experiences, rather than simple products or services. The value they are looking for comes from experiencing the use of a product or a service that is tailored to their specific needs and preferences. This is also a trend in business-to-business markets, where customers have begun to demand services (such as “power by the hour” or “miles of road use” rather than jet engines or tires). Delivering such experiences often requires complex and integrated systems.
Delivering even seemingly simple experiences like an impromptu meal out with friends is becoming more complex. Apps with location-based services on your smartphone help you to choose the restaurant with the food you like with the shortest waiting time. Other apps show you how to get there using the fastest route with a choice of travel modes. Social media links enable you to share the experience or rate the food and service. Complex supply chains spanning the world have probably brought exotic ingredients to the restaurant so that you can savor your preferred dishes. Companies can no longer satisfy the demands for these kinds of solutions and experiences acting alone. Innovative solutions and experience are becoming almost impossible to deliver by relying exclusively on the knowledge and capabilities of a few large specialist units within your own organization or linking with a few subcontractors. In more and more industries, the relevant knowledge and capabilities necessary to innovate are scattered among players and across the globe. Not only is the challenge of satisfying today’s customers demanding a wider range of competencies—in today’s world of volatility, uncertainty, and ambiguity, the activities and interactions between businesses underpinning your offering need to be reconfigured quickly and flexibly.
At the same time, many companies increasingly face pressure to focus on fewer core activities to reduce investments and avoid the increased costs of complexity. This focus enables them to target their capital expenditure on deploying the latest technology for their core processes and to concentrate on deepening their core competencies.5 “Focus and win” has become a popular catch phrase. But shrinking a business to a focused core of activities is at odds with customers who demand experiences and solutions that require more integration and complexity and that bring together multiple products and services, often in customized bundles.
There are many other examples of this trend. Simple mobile phones have been replaced by smartphones that can offer a myriad of services. In dense urban environments, cars have been replaced by services that offer transport by the hour. Complex financial products involving everything from insurance to equity release are replacing simple mortgage loans. In each of these cases, value is created by a combination of products and services that are delivered by an extensive group of partners. For instance, the concept of car rental by the hour anywhere, anytime, as it was developed by Zipcar (now a subsidiary of Avis) in Britain, the United States, Canada, Spain, France, Germany, Turkey, Belgium, and Taiwan; Paris’s now defunct Autolib or Car2go; and DriveNow in Berlin, required collaboration between a huge range of partners, including property owners and local authorities (who provided parking spaces) through to credit card companies, breakdown and cleaning services, and insurance companies.
One answer to the demands to “shrink your core, but expand your offering” problem is to outsource more to partners.6 But it is difficult to reliably deliver a complex solution bundle involving multiple technologies, capabilities, and services using vertical integration or the kind of subcontracting relationships common in traditional supply chains, where relationships and incentives are often antagonistic.7 Rather than outsourcing a few well-defined activities, delivering complex customer solutions requires the management of complicated interactions and exchange of knowledge between many mutually dependent partners, as well as trial-and-error learning—tasks to which ecosystem strategies are much better attuned.8
Knowledge Content Is Rising
A second important trend is that the knowledge content of many products and business activities is rising. The increase in the number of knowledge workers dealing with tacit and uncodified knowledge means that simple, standardized or physical interfaces no longer meet the needs for interaction and exchange required in many industries. Instead, knowledge that is more complex must flow between partners; boundaries of responsibility are blurred and need to be managed, as do the claims to intellectual property that are often jointly developed.
Ecosystems allow new value to be created by combining knowledge from a diverse group of partners. DS, the market leader in PLM systems, does this by creating application-specific user groups that collaborate on specially designed social network platforms.9 As we saw earlier, the basic principles of modeling and design of products and processes may be common across many industries, but effective software solutions need to incorporate in-depth—and very often tacit—knowledge of the industry in which it will be used. Designing cars or aircraft requires very different skills than designing fashion or applications for geological analysis. To digitalize the operations of mining companies, DS had to work with a mining group like Australia’s BHP Billiton, equipment suppliers like Atlas Copco, and university labs like the French engineering school UniLasalle, to just name a few. To access diverse industry-specific knowledge, DS collaborated, and continues to do so, with hundreds of partners, including system integrators, customers, and suppliers. For each of its solutions, it has created user communities on an internally developed enterprise platform for social networking called 3DSwYm, which was designed to dynamically share and leverage knowledge. This enables DS to uncover and harness individual talents and ideas inside and outside the company, including partners, suppliers, consumers or any other stakeholder. Connecting via communities helps this diverse group coalesce around key objectives and focus on how the ecosystem can create value. These communities also foster powerful synergies by creating an open and participative approach.
Sophie Planté, CEO of 3DSwYm, Dassault Systèmes stated that “3DSwYm empowers everyone, regardless of domain, to innovate and add value, share their experience and put forward ideas, fostering a strong sense of belonging and engaging everyone in the enterprise’s challenges and vision. . . . The result is a unified 360-degree view of activities and interactions shared across the [ecosystem]. 3DSwYm becomes a real-time social dynamic referential environment, offering effective decision and action support, leveraging social innovation to help transform the organization.” Monica Menghini, then executive vice president of Industry and Marketing at Dassault Systèmes added, “We are offering customers a value creation platform. Many disciplines within a company create value. All industries, from banking and insurance to retail, fashion, construction, energy, life sciences, transportation or aerospace, need to break down barriers and ensure value is created by all. 3DSwYm lies at the heart of our Social Industry Experience strategy.”10
This sharing across the ecosystems has enabled DS to become, and stay, relevant, innovative and successful across the eleven different industrial sectors for which it has now delivered software applications.
As knowledge management becomes increasingly central to competitive advantage, the model of an extensive ecosystem that allows knowledge and innovation to be generated rapidly through joint learning across a wide range of different partners, each stimulated by different contexts, histories, and cultures, is becoming more critical to success.
Developing an ecosystem with many partners enhances innovativeness, because it offers the opportunity for a thousand flowers to bloom. This makes ecosystem strategies—which have the ability to side-step many of the issues faced when trying to move and transplant knowledge, much of it embedded in the people, systems, and cultures of external organizations—increasingly appealing to boost innovation and discover new value.
Disruption and Uncertainty Are Becoming Endemic
Because of these three developments, companies now operate in an environment with increasing uncertainty, challenged by disruptive competitors who want to rewrite the rules of the game. Rapid technological evolution, the interconnectedness of the world of trade and business, and geopolitical instability are no doubt some of the reasons for this rising uncertainty. Witness the US financial crisis of 2008 and the ensuing years, when the interconnectedness of the banks and financial institutions brought down some of the most revered financial institutions. Or consider the fate of telecom operators, who made tons of money from SMS traffic, but now face stiff competition from internet-based social networking companies such as WeChat, WhatsApp, Line, Telegram and Viber.
Ecosystems, where partners can collaborate through loosely coordinated development and experimentation, can absorb uncertainty more effectively than traditional hierarchies or even subcontracting relationships, where deliverables have to be precisely specified in advance and structures are more difficult to reconfigure.11 As we shall see in chapter 5, this advantage is reinforced by the ability of ecosystems to enable ecosystem leaders to reap economies of scale and network advantages with lower capital investment. This is particularly important in winner-takes-all industries, where increasing returns to scale are decisive.12 Disruption, meanwhile, can be countered by the ability of ecosystem strategies to unlock new platform economies or create new industries.
Information and Communications Technologies Offer New Opportunities
While ecosystem strategies provide opportunities to create value in ways that address these challenges, some business leaders may have refrained from implementing them because of a fear of the complexity involved. But advances in ICT are making new business models such as ecosystems increasingly achievable and also more cost-effective. These technologies enable business ecosystems to marshal economically diverse resources and knowledge scattered across the globe, and create a “digital commons.” In the past century, networking between diverse and dispersed partners was often thwarted by the prohibitive costs of ICT. Although remote communication may not be a perfect substitute for face-to-face interaction in the near future, technological advances and falling unit costs are enabling more complex and dispersed ecosystems to become economically viable.
The way DS brings together its engineers and those working at its partners through ICT showcases how coordination of the development work across dozens of locations can be achieved. DS’s software platform enables engineers within its own labs or with partners, in places as far-flung as France, the United States, Japan, China, and India, to work together on a 3D design in real time with only an internet connection. This capability is a significant advantage for any company with a global engineering and manufacturing strategy. ICT can therefore enhance the breadth and depth of collaboration. Everyone, regardless of location or whether employed by the company or a partner, or working as a freelancer, can collaborate across business processes, from the lowest level of detail to the full product definition, bringing together the requirements and the functional, logical, and physical definitions of the product. Additionally, difficulties due to differences in language have been reduced significantly by DS creating a set of standard technical instructions for the actions that designers can take, which are language independent.
One of DS’s users is Renault, the French automotive company and part of the Renault-Nissan Alliance. It has deployed DS’s solution since 2009 across all its geographies and brands. The online access to the digital mock-up of its models and virtual twins has led to a simplification of collaboration between engineering sites. This use of a unique, collaborative interface for all developers worldwide supports simultaneous product/process engineering to get the design “right the first time”13
Renault’s original engineering processes, divided into three different silos with three different solutions, was transformed by adopting the unified collaborative DS platform using a single, standardized data model, and solutions that are deployable “out of the box” for all engineering divisions. At the heart of Renault’s strategy to transform its product development was DS platform’s virtualization of the entire product lifecycle within a flexible, precise, and truly collaborative environment. And it also reinforced collaboration with Renault’s partners and suppliers to ensure performance and data consistency between globally dispersed teams.
Renault wanted an integrated and collaborative PLM environment enabling greater operational transparency and the possibility to validate scenarios through virtual simulation and online management of the digital mock-up. This significantly eased decision-making throughout the stakeholder community and across the entire product lifecycle of Renault automobiles, from conception through to design, compliance, simulation, and manufacturing.
Discovering New Value: The Ecosystem Leader’s Role
Each of the four ways in which the development of an ecosystem can unlock new value—through new product bundles, new customer solutions, new platform economies, and spawning new industries—shares a common characteristic: they require a process by which new customer value is discovered. The new value is not just assembled or delivered from existing elements by following a predetermined blueprint; it has to be identified. Business ecosystems come into their own by facilitating the process of discovery.
Discovering new sources of value requires the three key capabilities that ecosystems excel at: a huge potential for rapid, joint learning and innovation; the ability to harness the capabilities of diverse players and channel them toward a common goal through the leadership of an enlightened company; and the flexibility for continuous reconfiguration in the face of an uncertain, fast-changing environment.
Given these demands, what can you do as an ecosystem leader to catalyze and promote the discovery of new value through your ecosystem strategy?
Focus Externally
The first thing you can do is to cast your eyes on what is going on outside your company, starting with potential customers. Few ecosystem leaders have succeeded by coming up with a new value proposition internally, designing their ideal ecosystem, and then determinedly trying to build it. Most started with a broad idea of where the potential for new value might lie, and then start talking to possible customers or piloting a product, service, or putative platform to engage them. In many cases, the value and the shape of the ecosystem that subsequently emerged was not exactly where or how they had expected it at the outset.
In fact, the value potential of some ecosystem strategies has emerged from early failures; in trying to understand and overcome the reasons why the initial customers rebuffed their first offerings, future ecosystem leaders have discovered where the value potential actually lies. The story of how ARM developed its first successful product shows how arduous, but also ultimately rewarding, the value discovery process can be. It might have been consigned to the role of just another specialist supplier had it not been for the negative reaction of the then leader in mobile phones, Nokia, to the first proposal that chip supplier Texas Instruments (TI) had pitched, which incorporated ARM’s designs. Among a long list of problems, Nokia pointed out that the ARM processor needed too much memory because the software code was too heavy. This made the product too expensive. But Nokia also recognized that there was not an offering on the market that provided the required performance and that the solutions to these problems were not obvious. In order to break new ground, they suggested the formation of a consortium consisting of TI, ARM, and Nokia to develop a new solution.
As a result, ARM found itself working closely with a partner who, as an original equipment manufacturer, was ARM’s “customer’s customer” (two steps removed in the value chain), as well as its direct customer, TI. The benefits of these kinds of close interactions with diverse partners, which went beyond ARM’s immediate customers, became obvious very quickly. ARM gained a detailed understanding of Nokia’s priorities and needs. Besides, it received detailed knowledge from TI about how to interface with its digital signal processing technology and what made a chip efficient to manufacture. This was the germ of what was to become ARM’s global ecosystem. Working with a network of partners and genuinely listening to their needs can help discover new value.
This ARM story also demonstrates something about the nature of the new value that can underpin a sustainable ecosystem. There has to be additional value for end customers. In this case, it was better functionality with longer battery life. But there was also additional value for the partners involved. For Nokia, that was the ability to deliver performance at low cost and hence a more competitively priced product. For TI, it was the opportunity to sell more chips. ARM itself directly benefited from increased revenues received on its designs from license fees and royalties. The indirect value for ARM, however, was even more important. By interacting with its partners, ARM gained valuable knowledge about next-generation product requirements from Nokia and new chip-fabrication technologies from TI. That knowledge enabled ARM to come up with a whole new generation of designs. The putative ecosystem not only delivered short-term revenues, but also began to prime an innovation engine with knowledge that ARM’s competitors lacked.
Such an innovation engine can create a virtuous cycle of value discovery. As ARM’s ecosystem grew, it discovered other types of new and additional value. Handset makers such as Apple or Samsung worked with ARM because they could share the costs of developing a flexible platform on which they could build their devices. That allowed them to concentrate their resources on developing their own proprietary technologies atop ARM’s base. Being part of the ecosystem for RISC chips also allowed the handset makers to choose from a wide range of semiconductor manufacturers, rather than being locked into proprietary technology. And it improved their chances of finding supplies whenever an upswing in the cycle led to shortages. For semiconductor fabricators such as TI and TSMC, the ability to sell to a wide range of OEMs helped them gain scale economies and manage capacity utilization. End customers benefited from improved reliability, lower costs, and faster access to technological advances that underpinned greater functionality and longer battery life. Ecosystems can deliver different types of value to many different partners.
Our next case study, athenahealth Inc., illustrates exceptionally well the process of discovering additional value through a relentless external focus. What has become today an extensive health care ecosystem, started out in the United States as Athena Women’s Health, a clinic founded when partners and former consultants Jonathan Bush and Todd Park acquired an obstetrics practice in San Diego, California, in 1997. Neither was a physician, but the former health care consultants thought they could efficiently and profitably manage a medical practice. Positive clinical outcomes, combined with lower prices, led to its growing popularity and revenues, and the practice soon expanded to more than a dozen clinics spread across California.
Despite their success, Athena faced a problem common to medical practices: being paid. The process of verifying and processing insurance claims, and thereafter being reimbursed, proved time consuming, costly, and difficult. Insurers, both Medicaid and private insurers, took weeks or months to reimburse claims. As a result, and despite growing revenues, Athena faced recurring cash-flow problems. To address this issue, Bush and Park recruited Park’s younger brother, Eddie, to develop a web-based billing system to track patients, handle medical billing, and carry out insurance eligibility checks.
Bush and Park soon recognized the potential value of their software solution, dubbed AthenaNet, for other health care practices. One important, and unexpected, signal came when Bush approached potential investors about funding the growth of the business. The latter expressed more interest in backing the software than the company’s medical practice. Realizing that Athena would be more valuable as a health care IT solution provider than as a medical practice, Bush and Park relaunched Athena Women’s Health in 1999 as athenahealth, a health care IT company. They began selling their cloud-based solution to medical practices across the country, focusing primarily on small-and medium-size physician practices providing outpatient care.
The new company’s first, and flagship, product was AthenaCollector, a cloud-based billing and practice-management software. It was followed by an integrated electronic health record service, a patient portal and automated messaging service, and an order transmission service that facilitated referrals, ordering labs, prescriptions, and inpatient admissions. Over the next decade, athenahealth’s software added more functions, such as options for maintaining patient records, communicating with patients electronically, processing insurance claims, as well as handling billing and reimbursements. By 2010, the company was earning annual revenues of almost $250 million.
Still, when the founders looked at the potential to create more value in the health care market, they realized they were only scratching the surface. It also dawned upon them that the limited capabilities within their own company presented a bottleneck to unlocking that potential. Drawing analogies from the success of Salesforce.com and Apple, the leadership recognized, as athenahealth’s VP of business development, Kyle Armbrester, recalled, that “it was not features and functions that drove their success. Rather, they’ve created huge value by supporting developers and start-ups that want to plug into their businesses.”14
If the transition from a women’s health clinic to a software solution provider was somewhat of an accident, the transition from a product-based strategy to an ecosystem strategy was quite deliberate. athenahealth’s leadership began to take steps to catalyze the development of an ecosystem of health care software solutions around their cloud-based IT product. The aim was to create what they called “the health care Internet.”
To start the process of discovering new value, the company launched a program called “More Disruption Please” (MDP) in 2010. This emerged after it had asked: “How can athenahealth become more valuable to its customers by leveraging the efforts of outside players?”15 At the heart of MDP was the conviction that “the rapid pace of change in health care made it impossible for any one entity to deliver every practice’s needs. By integrating with our MDP partners, we can bring each one’s focused expertise to our clients, offering specific functionalities that address caregiver needs.”16 Explained Armbrester, “It’s simply impossible for us to be the best in the world at developing everything our clients could possibly need, and we need to offer more services than we could ever possibly build ourselves. Instead, we can take pride in being the person who introduces our clients to those who are best at a certain service. Not building and owning everything actually allows us to go to market with richer products. By offering connectivity to the AthenaNet core, we open our platform to an array of innovative solutions for our client base.”17
Another key aspect of athenahealth’s external focus for discovering new value through an ecosystem strategy is: do not look only at what you have the capability to deliver; focus on the customer value that can be created if you also harness the capabilities of others. The strategy has certainly worked for athenahealth until now: From $250 million of revenues when MDP was launched in 2010, it surpassed $1.22 billion in 2017, making it one of the leading cloud-based health care IT companies in the United States. Seeing potential to grow it yet further, private-equity firms Veritas Capital and Elliott Management Corp. agreed to purchase the company for $5.7 billion in November 2018.
Concentrate on the Overall Value an Ecosystem Might Create
When trying to discover new value that an ecosystem strategy might unlock, narrowing the focus too early is usually a mistake. Yet, many companies do just that: they quickly narrow their field of vision, looking for products or services that may generate revenues or lucrative “profit” pools within the value chain required to deliver them.
Such myopia is natural; in the classic supply chains that companies are used to, there is a more or less fixed amount of value determined by the price the customer will pay for a product or service. Revenues and profits are, therefore, largely the result of who gets what share of the value generated; that is, how the proverbial pie is carved up. If one party gets more, the other gets less. Only recently have companies at the head of these supply chains come to realize that if they work with suppliers to improve efficiency and better align their capacity, they can eliminate sunk costs.18 That is the kind of thinking ecosystem leaders need to adopt on a broader canvas. At the outset, much of the new value an ecosystem can deliver, can be only hazily perceived. So, the focus needs to be on discovering more value potential: what will increase the size of the pie?
That is exactly what ARM did. When it was thinking about the value that could be gained by catalyzing an ecosystem to change the way OEMs satisfied their need for RISC-chip designs and speed up innovation, that was not the time to worry about whether the new process might prove a gold mine for its chip fabrication partners such as TI, Intel, or Taiwan Semiconductor Manufacturing Company (TSMC). In fact, if catalyzing the development of an ecosystem helps partners make more money, that is probably a good thing for everyone. If its partners were to make more money, that would not mean necessarily that ARM would make less. Discovering more value creation would mean both could capture more value. If the partners were more successful, the resulting ecosystem would be robust and sustainable. The key question was simple: Could developing an ecosystem benefit ARM? At this stage they needed to forget notions of trying to maximize their share of the pie because, as the old adage goes: “a high share of nothing, still amounts to nothing.”
Focusing on increasing the size of the pie rather than trying to maximize its share is a bet that Amazon.com Inc. (Amazon) made when it launched Amazon Marketplace in 2002.19 That platform enabled third-party sellers—ranging from individuals to start-up and medium-sized businesses—to offer their products on Amazon’s website. Amazon took that bold step, despite the fact that opening up its website to third-party sellers meant allowing competitors to sell on an equal footing with Amazon’s retail offerings. In the short term, Amazon could have captured more of the value that the ecosystem was then creating by locking out competitors to protect their own offerings and maximize their share of the pie. But CEO Jeff Bezos had a bigger opportunity in mind. Recalling the decision, he said, “The basic thought was: Look, we have this website where we sell things and we want to have a vast selection. One of the ways to get vast selection is to invite other sellers, third parties onto our website to participate alongside us, and make it into a win-win situation.”20
By opening the ecosystem to third-party sellers, customers were offered a larger and more varied selection at a range of prices, even as Amazon avoided stocking risky inventory. More and more customers were attracted, and the ecosystem grew dramatically. In 2006, Amazon extended its support to third-party sellers further by creating “Fulfilment by Amazon,” a service that provides storage, shipping, payments, and customer handling to small and medium-sized businesses using the website. By offloading selling, payment processing, and storage and distribution services to Amazon, which could benefit from economies of scale, smaller businesses could focus on simply developing and manufacturing their products, dispensing with the need to create a sales and distribution infrastructure, thereby cutting their costs and reducing time to market.
As a result, the Amazon ecosystem was able to offer more competitive prices and a more responsive service. More partners made investments that expanded and strengthened the ecosystem even further, opening up new profit opportunities for Amazon. Amazon took a cut of the expanded flow of transactions, deals that would otherwise have been lost to competitors such as eBay. It also earned revenues from providing fulfilment services while reducing its own costs through increased scale. In hindsight, Amazon’s decision to open up to third parties looks like a stroke of genius, but it has its roots in a simple idea: focusing on maximizing the size of the ecosystem opportunity rather than on your share of the pie.
Of course, as we will see in chapter 8, a balance must be maintained. Extracting an attractive stream of profits without harming the vitality of the ecosystem is critical for the ecosystem leader.
Making New Connections
Discovering any of the new sources of value requires new connections. These links may be between different products and services, capabilities, or knowledge assets that have not interacted earlier because they were isolated by boundaries between companies, by geographical distance, by technological incompatibility, or simply by the perception that nothing would be gained by bringing them together. To discover new value, every ecosystem leader needs to stimulate new connections.
Apple’s iTunes and App Stores are good illustrations of how this can happen. Both of these innovations facilitated connections between hardware, musicians, software developers, providers of services (everything from your airline to your restaurant or online grocery service), and payment providers in ways that had never been done before. ARM’s ecosystem brought together, directly and indirectly, semiconductor fabricators and tool developers, including knowledge from competitors in different sectors that had never before been combined. DS created new mechanisms for the knowledge of PLM and software engineers to come together with that of system integrators and suppliers, and interact with the industry-specific know-how of everyone from designers and modelers to maintenance staff across industries. Looking for ways to make new connections for innovating is a key role that ecosystem leaders can play in discovering new value.
Looking for Value Potential from Network Economies
In working out which new connections might be most useful to promote to discover new value, it is vital to consider the complementarity between potential partners in the ecosystem. The people to be connected may well be quite far apart from each other. ARM gradually discovered, for example, that the most fertile complementarities in its ecosystem were to be found in the knowledge that existed with the heads of the product and technology development staff in the OEMs and its engineers, even though these were two stages removed from each other in the classic value chain.
Another consideration is whether connections have the potential to generate positive network economies. As we know, the more people with telephones, the higher will be the potential value of a phone to any individual; the higher the chance, then, that the person to be contacted has one. In an ecosystem, positive network economies depend on more than the number of customers and partners in the ecosystem. The amount of value the ecosystem generates can also be influenced by the intensity of the interactions between participants, the types of interactions, the diversity of the partners’ capabilities, and the quality of those interactions, particularly the amount of new knowledge they create.
The fact that the new value an ecosystem generates depends on the nature of the interactions between the participants in an ecosystem—not just the number—opens up several possibilities to create mechanisms by which the ecosystem leader can help the ecosystem discover more value. Certainly, one thing an ecosystem leader can do is to attract more participants into its ecosystem. As we mentioned in chapter 1, Alibaba for example, launched its Big Taobao strategy in 2008 with the aim of encouraging a large number of potential new participants to join the ecosystem. It did that by allowing partners to join for free, and by making it easy for them to engage with it through a standardized portal and offerings tools, such as preconfigured shopfront templates.
ARM’s annual partner meeting shows us a different mechanism to help the ecosystem discover new value through new connections. The annual partner meeting is a three-day event unique to the industry, as it brings together a wide cross-section of ARM partners to a single venue, typically one of the colleges at Cambridge University. Although the criteria for inviting partners has varied over the years, the invitees usually include the OEMs and providers of complementary products and software as well as ARM’s direct customers. The role of this event is to provide an opportunity for ARM to present and discuss information, such as its current roadmap, with partners. Equally important are the large number of one-on-one meetings that take place between partners, sometimes involving ARM and sometimes independently, during the event. Facilitating this multitude of face-to-face contacts is an important way to help the ecosystem discover new, and often unexpected, sources of value.
Another mechanism to stimulate connections used by ARM is to promote virtual interactions between the broader community in its ecosystem, tens of thousands of developers and other participants, through its ARM Connected Community website. Managed by dedicated ARM executives, this online community provides free access to extensive resources for developers, a forum for developers and engineers to exchange ideas with support from the ARM ecosystem, and company and product listings classified by product category, market application, and ARM technology—all linked to partner sites.
Attracting a More Diverse Set of Partners
Another way an ecosystem leader can promote value discovery is to help attract a more diverse set of partners into the network. That was athenahealth’s primary objective for launching its start-up accelerator in 2014. The accelerator is designed to attract start-ups with well-developed products that need additional resources in order to achieve scale. In addition to workspace and seed funding ranging from $250,000 to $2 million, athenahealth offers expertise drawn from its employees and network of clients and partners, as well as access to its client base. It is focused on start-ups that are interested in joining athenahealth’s marketplace, but are not yet ready to do so. The aim was, as program director Mandira Singh pointed out, “to lower the barrier of entry for the best solutions.”21 This, in turn, brings more diversity into the ecosystem. Encouraging new entrants to collaborate with existing partners forges new types of connections. By bringing together previously isolated capabilities and pools of knowledge in this way, athenahealth is able to help its ecosystem discover new value.
Promoting Value Creation by Enhancing the Quality of the Interactions
The ecosystem leader can promote value discovery by initiatives that improve the quality of interactions between its partners. Alibaba made a conscious effort to improve the quality of the interactions in its ecosystem. Many of the websites in Alibaba’s ecosystem, such as those run by clubs or local information portals, carry links to other sites. But the quality of those links is usually poor, providing little relevant information to the viewers. By proposing optimal links to both Taobao storeowners and websites, Alibaba enabled its ecosystem to discover more potential value. As we mentioned in chapter 1, it then made the system dynamic so that Taobao Ke, the traffic aggregation system, could continually learn more about the behavior of buyers. That helped it to improve the matches between the linked websites and Taobao stores in real time. As a result, the links could vary by the time of day or the user’s location, helping the ecosystem identify the potential to generate more value.
Sometimes discovering new value requires the ecosystem leader to launch a specific off-line initiative. That was the case when Thomson Reuters, the global provider of news, data, and business intelligence, launched its “Legal Tech Innovation Challenge” in 2016. This became part of a new division carved out to become an independent venture in 2018 under the name of Refinitiv. The London Stock Exchange Group acquired it in August 2019. We will discuss this fifth case in more depth in the next chapter, but it is worth noting here that working with Stanford University’s Center for Legal Informatics (CodeX), Thomson Reuters invited partners in its ecosystem, as well as legal professionals, programmers, entrepreneurs, data scientists and any other interested parties, to develop new applications that improved the efficiency of the legal system by providing high-value analytics.22 Participants in the challenge were given access to federal court docket data, company information, and other data from Thomson Reuters and its partners. The outcome was a new model that could predict the likelihood of the success of motions to dismiss before specific judges in federal courts based on key details about the case. The director of innovation for the Thomson Reuters legal business observed: “Our customers are increasingly looking to the next generation of technology solutions to build and advance a better functioning legal system.” By creating a mechanism for learning with partners in its ecosystem and beyond, Thomson Reuters was able “to combine (our) proprietary content and domain expertise with a broad range of leading technologists to further fuel innovation and advance the practice of law.”23
When thinking about how to discover the new value that an ecosystem can deliver for you, it is worth remembering that your company may already have the roots or the kernel of an ecosystem today. It can include customers, vendors and suppliers, providers of technical expertise (such as universities and research institutions), and other players, including influencers and regulators. To build on this seed, it is worth asking yourself the following questions:
1. How can I transform the kernel of an existing ecosystem into a full-blown ecosystem?
2. What can I use it for? Creating new products or customer solutions? New platform economies? Or would I be able to develop a new industry?
3. What is it that I need to develop the ecosystem for? Is it to compensate for the focus that my company needs to pursue to stay efficient? Or is it to capture knowledge that I cannot develop myself? Or both?
4. What kind of ICT capabilities do I need to develop to manage the coordination and communication in an international ecosystem?
5. How do I create a vision of the value that the ecosystem can deliver, as opposed to the value that my focused company would be able to create alone? And how do I ensure an outside focus to capture the detail and the dynamics in the value required?
6. Is there any network effect in the ecosystem that could create otherwise non-existing value?
7. How do I develop the correct portfolio of partners in the ecosystem, encourage new connections between them, and promote and capture learning?
Seeing the potential to create new value for customers is the first step in catalyzing the development of a successful ecosystem. How you can realize that value is the subject of the chapters that follow.