Over the last decades, the interest in software ecosystems and business ecosystems has been increasingly strong. Many companies have observed the outsized success of the Apple app store for iPhone and are interested in achieving a similar situation for themselves with a large set of complementors building extensions to one product and having it act as a platform for the ecosystem. This would allow them to become the keystone player in the ecosystem, which is an enviable place to be.
In practice, we can identify multiple challenges with companies aspiring to become the keystone player in their business ecosystem. Three of the most important ones include the behavior of competitors and customers, scaling a multi-sided ecosystem and the interconnectedness of business ecosystems.
First, for a company to become the keystone player in its ecosystem, it will have to declare the strategy and start acting on it. Competitors will typically respond by taking actions of their own to avoid a situation where the company becomes dominant. This can take different forms, including offering solutions for free that the company wants to get paid for through the ecosystem partners, deploying fundamentally incompatible architectures or warning customers of the risks of vendor lock-in. Similarly, customers often dislike a situation where they’re condemned to using one particular vendor without available alternatives. Consequently, there’s a fundamental behavior in existing markets that seeks to avoid these kinds of situations.
Second, for a company to become the keystone player in an ecosystem, it typically needs at least a two-sided market consisting of producers of solutions complementing the platform and consumers of these solutions. The challenge is that initially, producers aren’t interested in developing these solutions as the total addressable market tends to be very small and customers aren’t looking for complementing solutions as these aren’t available. To break this, the company needs to fuel the ecosystem by paying complementors to develop solutions and in other ways encourage the development of these solutions. In addition, it’s very difficult to predict when the ecosystem reaches its ignition point where it becomes self-supporting. As it’s very expensive to fuel the ecosystem and the predictability is quite low, the leadership in the company may easily start to experience the initiative as a bottomless pit and pull the plug before the ignition point is reached.
Third, even if the company is the dominant player in its own ecosystem, the challenge is that this ecosystem typically is part of a larger ecosystem where the company is but a minor participant. The interconnectedness of ecosystems in many industrial contexts further complicates any attempts to become the keystone player. For example, several companies are currently jockeying for the position to become the dominant player in autonomous driving solutions that can be integrated into, in principle, any vehicle. Due to the nature of autonomous driving, there will likely be a single winner as the company that receives the most data back from vehicles in the field will typically have the best solution. However, the automotive OEMs are actively resisting this situation and to avoid the emergence of a single dominant player, they’ll likely support alternative vendors, despite these vendors offering inferior solutions.
In practice, most companies operate in a business ecosystem where they’re one of several players. The primary responsibility of product managers is to optimize their company’s position in a network of competitors, suppliers and customers. There are at least three priorities for them to achieve this optimal outcome: focus internal R&D resources on differentiation, seek to establish collaborative innovation with customers and, if necessary, reposition the company and the product in the ecosystem.
First, when dividing the functionality in the product into differentiating and commodity functionality, our research shows that companies typically put 80-90 percent of their R&D resources into commodity. One of the reasons is that they spend too little time and energy to outsource the development and maintenance of legacy functionality. One priority for product management is to seek to move commodity outside the company. Of course, simply paying a supplier to maintain some code frees up our own R&D staff, but it doesn’t lead to economic savings. For that, the supplier has to be free to offer the same functionality to others as well as this achieves economies of scale. This is often viewed as problematic in the company, but as the functionality is commoditized anyway, it really isn’t a problem.
Of course, there are other strategies to decrease investment in commodity functionality, such as replacing internally developed software with open-source or commercial software components or open-sourcing our own software in the hope that others will engage. The goal is, however, to proactively seek to reduce the investment in commodity to free up the resources for differentiating functionality.
The second priority is to engage in collaborative innovation efforts with customers. Although some or several of these efforts may not lead to successful outcomes, the few that do tend to position the company exceptionally well for delivering novel differentiating functionality to customers and share the upside of the innovation with the customer. In addition, it tends to cement the relationship and allows for a strategic rather than a cost-centric and transactional relationship.
The third priority is to continuously evaluate the strategic position of the product and the company and explore potential repositioning. This may involve forward integration into the value network, causing our customers to become our competitors and our customers’ customers to become our customers. It can also mean bundling additional products in our offering to provide an integrated solution, causing current partners to become competitors. Alternatively, it may require withdrawing from certain areas and yielding the ground to current competitors, suppliers and partners with the intent of forging new partnerships and focusing the resources of the company on the areas where it’s the strongest and has the best opportunities for differentiation.
The ecosystem scope is a difficult scope to manage because of its strategic importance and the, often, unrealistic expectations of company leaders concerning the ambition to become the keystone player in the ecosystem. Typically, the behavior of competitors and customers, the cost of scaling a multi-sided ecosystem and challenges related to the interconnectedness of business ecosystems make this an uphill battle for most companies. For a product manager, there are at least three priorities: focusing internal R&D resources on differentiating functionality, establishing collaborative innovation with customers and continuously exploring strategic repositioning of the product and the company in the ecosystem. To end with a quote from Pearl Zhu: “Innovation happens at the intersection of people, process, technology, customers and business ecosystem.”