Prof. Jan Bosch, 04 January 2021
In many industries, there’s an implied, often underspecified, architecture of how the different stakeholders in the ecosystem interface with each other. By defining their mutual interfaces, it allows for better alignment. For the typical interactions within the ecosystem, this is very helpful as the different parties have predefined expectations about one another, and transactions and integrations can be conducted, built and deployed more easily.
The existing business ecosystem gets encoded in the way a company organizes itself, including the work processes, workflows, automation, tooling and even job titles. For instance, a company that buys embedded subsystems for its products from suppliers will have processes for defining the requirements, purchasing professionals who negotiate the best deal with suppliers and tooling for testing deliveries from suppliers as well as for tracking the realization of requirements to sign off on contracts and allow suppliers to get paid.
However, there’s a downside to this implied ecosystem architecture: it tends to hinder innovation and experimentation by companies. Experimenting with different business models, introducing DevOps for the product throughout its lifetime, exploring new customer segments with the product – it all tends to upset the existing relationships in the ecosystem. This may easily cause a situation where the cost of innovation and experimentation is so high that it doesn’t get done. This is especially so when innovations require changes by multiple ecosystem partners – generally, the more partners are involved, the less likely it is that the innovation is even experimented with.
Let’s say, for example, that the aforementioned company decides to stop using a supplier and bring the development of the subsystem back in-house – something that happened in the automotive industry during the past years with in-vehicle software. This isn’t simply a technology decision. Rather, it requires changes to the tooling, reassigning of people in purchasing, significant changes to ways of working and internal processes as well as a potentially challenging legal situation with the former supplier.
'Where the architecture is rigid, the ecosystem runs the risk of becoming stale'
Where the architecture is especially rigid, for instance driven by regulation or a strong government customer, the ecosystem runs the risk of becoming stale. Due to the difficulty of incorporating change, the ecosystem’s ability to adopt productivity-improving innovations is so limited that, rather than individual players, the ecosystem as a whole may be disrupted. Industries such as construction, healthcare and university education are illustrative examples of where the pace of innovation in the ecosystem is particularly slow and where some are predicting a fundamental disruption may happen in the foreseeable future.
When it comes to the digital transformation of your company, this very often requires the organization to strategically reposition itself in its business ecosystem. Digitalization often causes a transition from a transactional to a continuous value delivery to end-customers. This means that companies that happily used wholesalers, resellers, installers and other partners to get their product out in the market are now looking for ways to build direct customer relationships. Removing the intermediaries requires careful management of the relationship with these partners as the old, transactional, and the new, continuous, business often have to coexist for several years, if not longer.
A second typical pattern is that work that was outsourced needs to be brought back in-house as the suppliers are unable to change their operating model to faster feedback cycles, there’s no good business model or the company considers the technology to be so critical that they want to own the competence internally.
Of course, the opposite happens as well: a technology and associated subsystems that were done in-house because of their strategic nature lose that status due to digitalization and need to be outsourced to new partners that might even have been competitors earlier.
A fourth pattern is that the company needs to involve new partners to manage new digital technologies, such as data and AI, or because the new position in the ecosystem requires new relationships with others serving the same customers. This often calls for a careful strategy as to where the company wants to own the market and where it’s open to partnering and letting others coexist.
Finally, there’s the challenge of startups and established, repositioning companies entering your existing or intended market. The organization needs to decide whether to partner or compete with these new entrants.
The digital transformation almost always requires strategic repositioning in your business ecosystem. You need to have a direct relationship with your end-customer, adopt new technologies and associated new partners, reinvent your business model, jump over existing partners without ruining the relationship for your legacy business and so on. This is complex and calls for careful strategizing and execution. But the alternative is that you get disrupted together with the existing business ecosystem. So, next to executing your New Year’s resolutions, also spend some time thinking about how you’ll initiate the work on repositioning your company in your business ecosystem. I wish you a prosperous 2021.