The Marketing Leaders

TML explores some ecosystem case studies, and how this strategy can help you to win market share through innovation.

We live in a world of competing ecosystems, especially in the world of information technology delivered services. ‘What’s an “ecosystem”?’ you ask. The term has many definitions, but our simple definition is a group of companies working in partnership to achieve one or more common objectives. For example, Microsoft and Intel work together to sustain the demand for new computers and software by developing high performance software that delivers improved user functionality, but also requires greater computing capacity.

SAP case study: focused business areas

SAP are developing a series of Industry Value Networks focused on industries including Banking, Public Sector, Consumer Products, Oil and Gas etc. SAP say:

“The success of the IVN strategy lies in the mix of focused business areas, IVN members, and the scope and depth of the relationships among members. Each industry value network benefits from a wealth of industry and customer insight and collaboration. The collaboration between IVN members goes beyond the technical integration of components to span joint business planning, solution definition and delivery, implementation, and support. IVNs capitalize on the know-how, products, and services of all its members”. Notably each IVN includes customers as “co-innovators of new solutions, providing guidance on solution prioritisation, requirements, and the roll-out process”.

A firm may be a member of several ecosystems, and of course these ecosystems may compete with each other. IBM, for example, has many divisions that are members of competing ecosystems. Its database software group has its partners, with which it competes against an ecosystem led by Oracle, but the division which markets servers and other higher performance/capacity computers works with its own partners in storage and software, including Oracle.

The purpose of an ecosystem is not just survival, but innovation. Managers establish business ecosystems to coordinate innovation across the partners. The activities of a business ecosystem lead to the setting of an agenda or even a programme of change for a market or a market segment, and determines the way in which each member evolves their product strategy. A well-functioning ecosystem can change the focus of a market from competing on cost to product innovation. Innovation can be a lonely business, especially for highly innovative companies. They have to drag their suppliers, partners and distributors with them for every innovation. But if they all work together as an ecosystem, with defined standards and interlocking modularity, the process of innovation can accelerate.

It also involves downstream implementation, right through to distribution and after-sales service. For innovation to take place rapidly and successfully, companies must work closely together. They cannot be black boxed to each other, but must work in a transparent partnership, with each company innovating in its component(s) of the ecosystem.

Each member is a specialist in one or more activities that determine how the whole ecosystem moves, so when an ecosystem works well, it is because a number of complementary firms are innovating to a common agenda. The largest ecosystems can involve hundreds of members – witness the partly overlapping ecosystems that support the two major airframe manufacturers, Airbus and Boeing. Right at the other end of the market, companies producing Apple iPod accessories are in the iPod ecosystem. So are companies that license music via iTunes, and consumers who buy the music.

Case study: the iPod ecosystem

An entire marketing ecosystem has emerged around the iPod music player. The simple design encouraged people to personalise the machine and has doubled the number of iPod accessories available in the last year. It is also estimated that docking stations will be available in 40 percent of cars sold in the United States this year. About 28 percent of all accessories are cases, including low cost sleeves or an expensive python-skin case made by a producer of stylish leather handbags. About 30 percent of sales are for car chargers or transmitters and the remainder are speakers and docking stations.

The wider ecosystem includes the ‘Nike + iPod Sports Kit’, a baby stroller with a slot for an iPod, a belt with an iPod holder as the buckle and even a massage chair with an iPod holder in the armrest. Apple could not be happier about this exploding iPod economy. "For us it's great because the decision to buy an iPod is reinforced when consumers see all the accessories," said Greg Joswiak, Apple's vice president for worldwide iPod marketing, while other companies are now achieving $1bn revenues from the same ecosystem.

An ecosystem cannot be managed just at the level of product strategy. If it were, an individual company might destabilise it by deciding that its interests are better served by changing its innovation direction away from that followed by other members of the ecosystem. Visions, capital investment, research and development investment and operating processes must also be aligned. Interfaces and protocols are needed to assemble their contributions. Finally, they must be in close dialogue with customers so that what the ecosystem creates is what customers want and will buy. One way of describing the innovative process of an ecosystem is “distributed, coordinated creativity.”

Ecosystems are notoriously hard to hold together – some clearly demonstrate centrifugal forces, as other corporate requirements influence the direction of companies. For example, in CRM, the IBM-Siebel ecosystem was just beginning to yield its first fruits when the financial interests of the founders of Siebel agreed an acquisition by Oracle. While IBM works closely with Oracle in some areas, it competes with Oracle in other areas. IBM also works with other CRM software suppliers, such as Chordiant, Kana and Epiphany. Who knows whether the IBM-Siebel ecosystem will survive in such circumstances?

Ecosystems require a certain level of disclosure between partners. In general, companies are used to observing secrecy about strategies, for example. Close stakeholders such as employees and investors are not usually informed about strategic direction, or only on a ‘need to know’ bases, still less on how the company is thinking about different partnerships. Although in some ecosystems, a culture of disclosure arises, particularly when one company effectively outsources innovation to another, this is rare. This applies particularly to policies designed to influence the direction of the ecosystem – obviously each member has a strong incentive to try to steer the ecosystem in a direction which makes most profit for it, though of course the wise members uses long term profit as the criterion, not short-term profit.

Case study: Microsoft.net

Microsoft .net is the basis of a number of industry ecosystems, where the required innovation is provided by refreshing new partners. In the .net Commercial Insurance value chain companies including www.QKnow.com and www.MooreStephens.com provide additional skills and specialist business function based on Microsoft .net that a larger company would likely find near impossible to define, develop and deliver.

Managing an ecosystem can seem a bit like herding cats, and the cats are the managers! What this means is that the managers themselves may not be too aware of the influence their own actions have on the direction of the ecosystem. Each member of the ecosystem has a strong incentive to issue thought leadership which encourages its preferred direction. Indeed, one of the most notable characteristics of business to business ecosystems is the high rate of issue of so-call thought leadership. Sadly, much of it is not true thought leadership, but brochures thinly disguised as thought leadership (the ‘whitepaper’).

Case study: Amazon

Amazon has developed from an online direct sales service to a broad ecosystem for buyers and sellers. Buyers of books and other items can resell them through Amazon, while other suppliers can provide the same goods as Amazon using standardised sales processes of display, checkout, customer reviews, delivery prices etc. Amazon gain from commissions and the attraction of customer choice, while others in the ecosystem are prepared to pay commissions to win revenues as part of this marketing and sales community.

For the customer member of an ecosystem, the phrase ‘buyer beware’ applies. An ecosystem involves its own set of standards, possibly not entirely consistent. When you buy the product of an IT ecosystem, you need to keep in touch with the players that continue to innovate in that product area. In one case, a bank encouraged the acquisition of one ecosystem member by another in order to ensure business continuity – it was worried that the latter company would not survive, and it wanted the product to continue to be supported.

Case study: WorldCom

WorldCom's failure had negative repercussions for the entire ecosystem of suppliers of telecommunications equipment, as they played the role of an ecosystem ‘Keystone’. Keystone companies (such as Wal-Mart, Microsoft and others) both provide and distribute value within their ecosystems. In revenue terms they may be a small part of the ecosystem, depending on market definition of course: for example Microsoft has a disproportional effect on the total computing market for its relative size. Keystones increase ecosystem productivity when healthy, but severely damage it when they fail.

For the supplier member of the ecosystem, the lesson is ‘he who sups with the devil needs a long spoon’, because the direction of ecosystem development is often in the end determined by the interests of the very largest companies, who tend to end up dominating the ecosystem until it is replaced by another whole ecosystem. ‘Make sure you make your money fast if you are a small member, and try to exit through acquisition by another member’ would not be a bad rule to follow.

Professor Merlin Stone is Professor of Marketing at Bristol Business
School and Director, Nowell Stone Ltd.



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