New technologies and business models require businesses to innovate their products and services faster than ever. Organisations are facing mounting pressures to adopt digitisation, robotisation, artificial intelligence and flexible consumption models. Companies that fail to complete their business transformation timely will eventually lose their ‘right to play’ with closure or M&A as the only options left. Whilst most companies have established innovation processes into their business, business leaders are now facing a new and even bigger challenge. This happens the moment their playground starts changing from value chains to ecosystems …
Smart Cities, Self Driving Vehicles, eHealth and Smart Manufacturing are examples of developments that unfold in new ecosystems. Traditional value chains consisting of a limited number of preferred supplier relationships – albeit very efficient – no longer fit the ecosystem dynamics. Contrary to existing industry dynamics, the complexity of ecosystem value propositions requires intensive collaboration between technology vendors, infrastructure players, platform operators, government institutions, start-ups and universities.
To become relevant in new ecosystems, corporations need to elevate their partnership approach. Yet, despite the effort most corporations take to experiment with open innovation and corporate venturing, business leaders will experience that they need to fundamentally change their operating models too. A new approach is needed as the golden relationship between value creation and value capture – as we know from traditional value chains – is broken in new ecosystems.
In this article I will share my perspectives on the notion of ‘ecosystem value propositions’ and introduce three ecosystem-operating models for organisations to consider to participate, create and capture value in new ecosystems.
Ecosystem Value Propositions
The main characteristic of an ecosystem value proposition (EVP) is that no individual actor is having the knowledge or ability to develop and implement the solution entirely by herself. Examples of new ecosystem value propositions are found in IOT, autonomous-driving, eHealth and the energy transition movement, which are all pulling billions of investments into R&D, start-ups and infrastructure.
Value creation versus value capture
Most operating models have been developed for traditional value chains. These models are typically not applicable to EVPs. In traditional value chains actors are seeking the highest return on investment by optimising the equation between the efforts it takes to create value versus the possibility to capture this value. In the past decades, we have seen the rise of contract manufacturing, business process outsourcing and the services industry. With clear roles, and distinct activities amongst the players in the value chain, value creation and value capture were tightly linked and no profit leakage existed.
Once an industry is exposed to new technologies and business models, the order in the value chain will become diffuse due to new entrants and ‘vertical’ competition. This is even truer in the digital arena. A good example is the media industry whereby content creators, aggregators and distributors are seeing their traditional roles changing as a result of digitisation and over-the-top (OTT) enabled by new video distribution technologies. The clear division of roles no longer exists as content creators have found their way directly to the end-consumer and aggregators are no longer dependent on content distributors only. The result is a growing consumer surplus whereby the end-customers are getting the most benefit: more value at a lower price. The digital transformation in the media industry is a perfect illustration of a broken relationship between value creation and value capture.
For corporations to develop an operating model to successfully participate in the development of an Ecosystem Value Proposition, at least three questions need to be considered:
- How to deal with a wide range of different actors such as competitors, start-ups, universities, NGO’s and governmental organisations?
- How to organise participation in the ecosystem with regards to roles, activities and contributions?
- How to capture value in a situation of little control over the EVP creation process?
Three Ecosystem-Operating models
I see three Ecosystem-Operating models emerging to address the above described questions albeit in a different manner depending on ambition, abilities and risk appetite. The three models are: 1) the platform-operating model, 2) the interface-operating model, and 3) the operator-fund model.
I. The platform-operating model
Currently, the default response to industry disruption is the development of a platform strategy. In new ecosystems, platforms are needed to connect the various players, technologies, propositions and customers. The challenge is that for each Ecosystem Value Proposition there is only space for a small number of platforms with the number one taking a more than proportionate stake (see my article on the Value Stack on H17.co). With up to thousands of participants in new ecosystems, traditional industry players need to overcome significant roadblocks with respect to cannibalisation of existing revenue streams, channel conflicts with existing suppliers and clients and the development of a tech & data savvy organisation. Platform strategies may not always be the best option to go after unless one is very confident to successfully deal with above-mentioned roadblocks.
For organisations that are not in a position or don’t have the capabilities to develop a successful platform-operating model, two options remain: the interface-operating model and the operator-fund model.
II. The interface-operating model
The objective of an interface-operating model is to enable ecosystem collaboration on an activity level throughout the enterprise stack. The purpose is to jointly develop, produce and service a better solution from a user perspective.
Through interfaces – in the digital world called API’s (Application Programming Interfaces) and SDK’s (Software Development Kits) – organisations define which functionalities, activities and data can be exchanged with third parties. More innovation, faster time-to-market and new revenue models are often the result.
There is one caveat of the interface-operating model. If one of the participants in an ecosystem has the ability to turn its business into a platform-operating model, the other players need be aware of the risk of getting locked-in to the platform and to loose the ability to differentiate. Furthermore, there is a tendency that the platform player will start adding along the way more services that were originally provided by the platform participants. Wrong choices in this respect can lead to a ‘race to insignificance’.
In traditional value chains – from sourcing to production to distribution – most companies have organised their relationships contractually. However, in new business areas, organisations are in the early stages of experimenting with open innovation, partnerships and open source. Likewise traditional value chains, these new collaboration models too require a governance approach for IP, data ownership & protection, confidentiality, risk and contribution & reward. For more information see my article ‘Ecosystems require corporations to rethink their corporate governance’ on H17.co‘. However, as there is no established ecosystem governance best practice, I suggest following a four-step approach:
- A well-designed interface strategy starts with an organisation to identify the areas to collaborate with third parties. Such collaboration concerns for example the exchange of data, IP, knowledge, insights, products, solutions, sales and customer relationship.
- Given the complexity, business leaders are recommended to first select a limited number of areas for ecosystem experimentation and collaboration. Once selected, a principle based partnership framework will govern a wide range of potential partnerships.
- From this point onwards, the organisation needs to consistently work on removing any friction that exists for ecosystem players to engage with your organisation. All governance related improvements would be reflected in a regularly updated partnership framework to ensure all learnings are captured.
- Only, once a certain partnership (model) is maturing or starting to make serious business impact, the involved partners need to start thinking about formalising the partnership framework into contracts.
III. The operator-fund model
The operator-fund model consists of a portfolio of loosely coupled business units, portfolio companies, and/or (joint) ventures. While the realisation of cost synergies is not the primary driver, the companies in the group are collaborating on Ecosystem Value Propositions at scale.
Companies executing an operator-fund model pursue the better of two roles: strategic operator and venture capitalist:
- Through the strategic operator role, business leaders create a platform for the portfolio companies to develop a winning EVP. Portfolio companies stay relatively independent but are encouraged to seek collaboration within the group. The group only provides support in those areas where it makes a difference.
- Through the venture capital model, business leaders have the opportunity to take stake in the development of EVP’s by bringing together the relevant companies and start-ups. Depending on the desired involvement in the portfolio company and the maturity of the MVP, an operator-fund strategy enables a flexible approach towards deal structuring ranging from minority investments, joint ventures, to full acquisitions.
Most Fortune 500 companies have a corporate venturing arm, which is a first step towards the operator-fund model even though a more radical transformation will be needed. See also my articles ‘The return of corporate venturing: business first’ and ‘Ecosystems, driving the core or the developing edge?’ . The investment strategy and portfolio thinking at Alphabet, Naspers and Softbank show interesting elements of how the fund-operator model may unfold in the near future.
In this article I shared my perspectives on the notion of ‘ecosystem value propositions’ and I introduced three ecosystem-operating models: 1) the platform-operating model, 2) the interface-operating model, and 3) the operator-fund model.
Depending on ambition, ability and risk appetite each of the three discussed models could enable an organisation to successfully participate in the development of ecosystem value propositions and to re-establish the broken link between value creation and value capture.
Realising that it is still very uncertain how ecosystem propositions will unfold going forward, please consider the above-described models as a preliminary view in a new but very interesting field that requires more research going forward.