Companies that succeed in the digital economy use scale, scope, and speed to their advantage. But that’s hard for a company to do on its own, which is why collaborating with other companies is so important. In industrial-age economies, the leaders were the companies with the best vertical integration. For example, a manufacturer owned its suppliers and its distributors. In digital economies, the leaders are the companies with the best virtual integration. Those are companies that assemble and manage the best network of products and service providers.
Here’s an important distinction. With vertical integration, suppliers, manufacturers, and distributors act independently. A supplier contributes its products and services to a manufacturer and earns profits from that sale. It repeats that process with other manufacturers but has no special interest in the final product or in consumers’ experience. With virtual integration, companies are interdependent and connected. Together, they create and nurture products and services that give all of them a competitive advantage. They aim to increase the value of the products and services so that each of them can claim a larger part of that profit. That’s the value of working in ecosystems.
There’s another distinction. In ecosystems, companies are defined by their business model. Each model represents distinct expertise and delivers unique value. And ecosystems that comprise a range of companies—and a good mix of business models—are powerful and vibrant. There are four archetypical business models:
a) Product: These are the tangible items that we know from the industrial era, such as computers, washing machines, and lightbulbs. In the digital era, these products are fitted with sensors and software to capture data and link them to other products and services.
b) Service: These are the intangible actions that are performed to fill a need or satisfy a demand, such as education, banking, and hotel accommodation. In the digital era, they
are supported, shaped, and delivered by digital technologies. The services get smarter as the data about them gets richer.
c) Platform: These are the computer operating systems, smartphones, and search engines that connect companies transacting with customers. As platforms connect more individual companies, the value to consumers of their products and services is increased. Why? Because they gain scale, scope, and speed together that none of them could achieve on their own.
d) Solution: These are customizable products, or a mix of products and services, that solve specific problems through data and analytics. As the machines get smarter, they observe, understand, and make recommendations. Think, for example, of the conversational bots we saw in Part 3. Whereas the number of players drives a platform, the relevance of those players drives a solution model.
To better understand how these various business models add value to an ecosystem, consider the lightbulb in the following reading.
Every ecosystem has a hierarchy. The followers are called participants and the leaders are known as orchestrators. Every company, in every phase of transformation, can benefit from orchestrating or participating in ecosystems. The first winning move is knowing when to participate and when to orchestrate in each of them.
Participation
Participation means supporting the ecosystem by delivering one or more important pieces that make the ecosystem distinctive. To participate successfully, a company must identify its core strength. What makes the business distinctive? What business model drives value for the company? Once that’s clear, allow others to link to create value greater than would be possible alone.
Joining ecosystems is a valuable way to learn and understand the complexities and nuances of how digital features influence business. It is important for making strategic alliances, staying current with new digital technologies and experiments with them, and observing what competitors are doing.
Orchestration
Orchestration means pulling together companies with different business models and strengths in different industries and connecting them across traditional boundaries. Digital giants may have an edge in orchestrating initially because of their scale and scope, but all companies can earn this right. Begin by orchestrating mini-ecosystems within a larger one. Or by partnering preferentially with a digital giant to bring distinctive value to the group.
Leading ecosystems is a valuable way to learn and to expand networks, but the orchestrator’s role is never guaranteed. To select its orchestrator, participants in an ecosystem weigh 6 criteria: 1) vision, 2) distinctiveness, 3) ability to govern and manage conflicts, 4) ability to attract complementary partners, 5) ability to earn respect, and 6) ability to adapt to change and lead proactively. Failing to meet expectations in any of these areas is a sure way for orchestrators to lose the support of their participants.
Use the following exercise to further understand the idea of orchestration. You will need to print off the Do You Have What It Takes to Orchestrate? worksheet, found below.
Worksheet – Do You Have What It Takes to Orchestrate? (PDF)
Pick an industry that’s of interest to you. For example, telecommunications, mining and petrochemicals, film and television, education, or pharmaceuticals. Identify the industry incumbents, tech entrepreneurs, and digital giants actively involved in that industry and list them in the left-hand column of the worksheet.
Next, pick one of the companies and assess its capabilities in each of the six areas. For each area in which the company has demonstrated capability, place a checkmark in the corresponding box on the worksheet. Repeat this exercise with the remaining companies on your list.
Review the checkmarks. Does one company stand out as the logical choice to orchestrate one or more ecosystems in this industry? If not, how might the competing companies earn the right to orchestrate?