Ecosystems - more than just a buzzword?
We are living in an era where innovation is imperative. No one can deny the profound transformation of businesses shaped by an increasing pace of technological development, expanding global com- petition, changing customer demands and decreasing product life cycles. Leadership has thus to respond in order to adhere to the new dynamics of the digital world. In search for alternative business models ecosystems are currently hyped more than ever. The predominant objective thereby is to combine several different business ideas into one superior experience collectively offering more than just the sum of its pieces. As one of the leading corporate venture builder we have been excelling in building ecosystems from the beginning. At the same time we are observing that not only many attempts to establish ecosystems have failed but also the terminology is often misleadingly applied. So first things first, what exactly is an ecosystem?
In the jungle of buzzwords it is crucial to differentiate three terms: marketplace, ecosystem, and platform. Marketplaces enable the exchange of demand and supply by mainly providing transparency on pricing and availability of goods and services. Ecosystems take things a few steps further. An ecosystem provides an individual with everything they could possibly need regarding a specific topic. This includes demand and supply but extends to all sorts of information and social exchange a specific topic could ask for. We therefore define an ecosystem as a “system that answers all needs customers or suppliers have regarding a specific topic”. An ecosystem thus often consists of multiple business models or startups. Platforms are also mostly at least two and often multi-sided businesses but they are not necessarily enabling transactions. Some platforms purely exist to empower the exchange of information between different groups of people. Knowing this, one now understands that market- places and ecosystems both are platforms. One also will comprehend that these two are just two of many potential occurrences of platforms. Leveraging our expertise resulting from practical proven case studies we define five success factors for winning ecosystems.
Five success factors for building ecosystems:1 ) Alignment with core strategy and leveraging unfair advantages. In order to build winning ecosystems we believe it is vital to define a clear ecosystem strategy that is thoroughly derived of and jointly aligned with the core strategy. Just like venture capital investors have investment theses that specify the types of startups and markets they invest in, every corporate has to set out a clear view of the future to install guard rails concerning the ecosystem activities the company will or will not consider. Thus, specifying crucial elements such as the vision of the ecosystem, preferred revenue streams and technologies as well as targeted markets and customer segments is mandatory at the very beginning. This not only ensures sufficient guidance and efficient resource allocation but also commitment of all stakeholders involved. Furthermore, the specific definition of unfair advantages determines the probability of the ecosystem’s success, especially in corporate venturing. Defining what a company excels at to strengthen its business model defensibility is thus vital as one cannot benefit from unfair advantages until one can name them. By carving out accessible assets such as existing sales channels, insightful data pools, bigger financial resources or profound expertise that can be leveraged, not only growth can be accelerated but also the ecosystem’s credibility is guaranteed early on when entering the market.2 ) Think big, start small.If one elucidates the word ecosystem, it comes clear that the complexity of such business models is already inherent in its terminology. In biology an ecosystem is a community of living organisms in conjunction with the nonliving components of their environment, interacting as a system. By transferring this analogy to the digital age, the necessity of an evolving approach in building ecosystems is evident. The inflationary cited phrase “think big, start small” may sound buzzwordy but definitely holds true when it comes to building ecosystems. We therefore developed a model consisting of 4 phases to sequence the complexity in practical and applicable slices to successfully maneuver from a niche player towards an ecosystem.
To kick-start the market entry the preliminary objective is to target a very specific need of a very specific customer target group to gain traction early on building the foundation for the ecosystem. By (vertically) diversifying and iterating the business along the customer journey a broader audience and product-market-fit is achieved. This signifies the tipping point from a product-based approach to a portfolio-driven business. In order to respond to the requirements of an ecosystem the provision on an integrated and holistic value proposition consisting of multiple solutions orchestrated from one single point is decisive to fulfill all stakeholders’ needs. Leadership’s vision, commitment and endurance are inevitable throughout the journey as the business will operate as a cost center for some years before first profits will occur on the P&L.3 ) Business model innovation and independence from the core.Building an ecosystem signifies to come up with a completely new business model. The necessary steps to do so are highly distinctive from activities within the field of digital transformation or managing a traditional corporate portfolio. In order to successfully build an ecosystem one should extensively incorporate five guiding principles of business model innovation: (1) allocate freely the critical financial and human resources needed to carve out a strong position in the market; (2) enter the market as early as possible; (3) leave long-term forecasting behind, innovation is not stable; (4) adapt your governance to actionable metrics (e.g. unit economics); (5) develop needed capabilities fast and ideally in ambidextrous, this is, independent settings. Especially the last one seems to be a tough one. The (new) unit that is responsible for building the ecosystem needs as much freedom as possible to operate quickly and in a targeted manner. This do not signify that there should be no governance structures installed. But it clearly does mean that independence from the core is key to innovate business models.4 ) The customer in the center - for real this time.Nowadays, all companies claim to have customer-centric organizational structures that ensure the navigation of all activities towards the needs of the customer. Leaving the question, if this holds true aside one can agree that this is not surprising: the most successful companies such as Google, Apple, Facebook, and Amazon, every startup in Berlin, Tel Aviv, San Francisco, and New York as well as many frameworks, concepts, guidelines, and blueprints published in the last decade (e.g., Lean Startup, Lean Analytics, Running Lean, Business Model Generation, Digital Playbook - to just name a few) tirelessly underline the value incorporated in the idea of customer centricity. Thus, as easy and redundant as it may seem, we will not leave the opportunity unseized to jump on this custom- er centricity bus by highlighting the importance of constantly and holistically thinking about and jointly with the customer when building winning ecosystem is the objective. As we stated above, the predominant characteristic of an ecosystem is to respond to all stakeholders needs across the whole customer journey, this is, from awareness over transaction to retention. As no one can predict all existing desires of players within an ecosystem and there is a high probability that those needs will change over time, it is vital to attract (paying) customers and other stakeholders early on to build the ecosystem with them by tirelessly and holistically keep changing needs throughout the entire customer journey as a focal point.5 ) Bait and lock-in effect - the secret sauce.Last but not least we put emphasis on two further guiding principles in building an ecosystem. If one thinks of the beforehand stated success factors as the main dish predominantly cooked to respond to the feeling of being hungry, those two principles may symbolize the secret sauce that makes the main dish a joyful experience for a friend, family or beloved one (i.e. the customer). The first principle is called “bait”. This effect is realized by equipping the ecosystem with unique functionalities, products or services that attract customers by providing for instance a free at charge premium. The benefits of this approach lie within the effect of customer referrals. By providing such premiums the viral coefficient as a key actionable metric can be tested by the ratio of the number of new customers attracted by one existing customer. The more this ratio rises the more one can be sure that the product-market-fit has been achieved. The second principle is called “lock-in” and is centered around the idea of creating an offer the customer can not renounce at all or only by facing high transaction costs. This is, thus, more focused around value capturing and the continuous aim at increasing the customer’s lifetime within the ecosystem. This two easy to understand but more difficult to implement principles should always be at the heart of thinking when building winning ecosystems.
Case Studies:1 ) 50 million € backed ecosystem livingThroughout the last years Bridgemaker has started to jointly build a smart living ecosystem with one of the leading insurance companies in Germany. The vision is to leverage the synergies of marketing not only smart home products and services but also specifically tailored insurances to satisfy the customer’s needs along the journey of searching, selecting, maintaining and operating a property. In other words, the venture’s aim is to help customers to overcome the challenges of modern living by providing vetted ideas, solutions and support for a more secure, comfortable and healthier daily life. In the following we would like to highlight the success factors 1, 2, and 5.
» Alignment with Core Strategy (1):
The ecosystem’s vision was deliberately elaborated in strong alignment with the core strategy. By applying the core strategic guidelines crucial elements detailing the means of the ecosystem were defined, prioritized, and translated into a 3-years roadmap to provide guidance and ensure commitment. Furthermore, the corporate’s existing sales channels have been leveraged to profit from unfair advantages from the beginning.
» Think big, start small (2):
The evolving approach of building a winning ecosystem have been applied from day one. The developed roadmap incorporates four consecutive and logical steps: (1) fastly test and learn from offering various smart living products and services ideated by applying Bridgemaker’s methodology; (2) provide a tailored e-commerce shop while leveraging the lessons learned to gain traction; (3) expand the portfolio by continuously onboarding suppliers; (4) align all services and products offered in the ecosystem to ensure an integrated and unique customer experience.
» Bait and lock-in effect (5):
To attract and lock-in customers various premiums are offered. First, an attractive and aggressive pricing strategy for the hardware portfolio is applied to win market share. Second, free at charge smart living services and content providing an added-value to the hardware are offered. Third, the portfolio of products and services is continuously expanded to ensure a one-stop-experience. And last but not least, smart, this is, flexible and cost efficient insurances specifically tailored to the individual needs ensure the ecosystem’s relevance in the customer’s daily life.2 ) 25 million € backed ecosystem mobilityTogether with a leading German energy provider we are building an ecosystem with focus on future mobility. This ecosystem is based on several different business ideas that are managed independently. Together with the corporate leadership we have designed an ecosystem strategy that values all of the above success factors. Special focus was put on 1, 3, and 4.
» Alignment with Core Strategy (1):
The alignment with the corporate core strategy is based on especially one focus area: development of rural environments. Consequently, the majority of business models is managed in close alignment with local government bodies to ensure constant regional focus.
» Independence from the Core (3):
In order to keep the right distance from the core for every business model three different building approaches are followed: classical VC investments, intrapreneurship based businesses and corporate venturing. The last two are both built and orchestrated separately from the corporate by either internal teams or by Bridgemaker.
» Customer in the Center (4):
To ensure the customer’s perspective is at the center of the ecosystem the corporate decided to follow Bridgemaker’s unique ideation approach to fill white spots in the portfolio. The idea is to start with actual customer problems, thoroughly understand how the ecosystem can solve them and consequently build what is missing to achieve best customer satisfaction.
Building ecosystems may be the last hype but also represents the next logical step in the evolution of venture and startup building. By combining single business ideas to full-blown ecosystems, true customer satisfaction can be achieved and long-term profitability is actually possible.
However, building ecosystems is hard work. It is a costly decision to start investing in ecosystems and thus has to be evaluated thoroughly from the start. So far many attempts have failed or actually have not really tried to build an ecosystem but applied a buzzwordy approach to gain press coverage. Bridgemaker is one of the few Venture Builders in Europe that actually excels in building ecosystem in several industries. Feel free to contact our experts and ask about a free assessment of your approaches at any time.
Author: Kilian Veer (Partner) & Jonas Hammes (Sr. Venture Architect)