After decades in the industry, I have yet to meet the first company that doesn’t claim they’re customer centric. There remains a widely held belief that if we focus all our energy on the customer and build what the customer tells us to build, we’re going to continue to be successful. Still, the quote from Henry T. Ford about asking customers what they want (a faster horse) is relevant in today’s world as well. We shouldn’t ask our customers but rather invent the future ourselves and then request feedback.
The focus of this post, however, is on the business ecosystem in which we operate. Stable and long-lived ecosystems tend to be horizontalized with very clear roles for the players in them. The ecosystem is typically enabled by an architecture that defines interfaces between the different components in the ecosystem and, by extension, the interfaces between the companies operating in the ecosystem. As business strategist James Moore already discussed in 1993, companies can be viewed as organisms in an ecosystem and the ecosystem provides benefits in terms of an improved competitive advantage that doesn’t exist outside of the ecosystem.
A good example is the computer industry. During the 1970s, the main computer companies built everything in-house, including the chips, the motherboards, the operating systems and the applications. They did their own sales and service and were a completely vertically integrated ecosystem. In the following decade, the computer industry horizontalized and specialized players for each of the components in the ecosystem appeared. So, we got Intel developing chips, PC makers like Dell, operating system providers like Microsoft, numerous application developers and, at the time, computer stores selling computers and software.
The challenge of business ecosystems is that many assume their architectures are cast in stone. It’s like the story of the old fish meeting a few young ones and asking “how’s the water?”, upon which one of the youngsters asks its friend, “what’s water?” The interfaces between different players start to become increasingly petrified in that there’s increasing automation, agreed-upon service level agreements, implicit expectations from customers, partners and suppliers, and so on.
Consequently, the ecosystem becomes increasingly static and change becomes impossible to realize. This can reach a point where the partners hold each other hostage in that any change proposed by any player will cause that player to be ousted from the ecosystem. Even players that have significant gains to expect from strategic changes are unable to execute these changes as the lost revenue from the existing business in the short term can’t be replaced fast enough with the new business.
Especially in regulated industries, there are numerous examples of companies that hide behind government regulations to avoid competitive pressures and keep new entrants away from their industry. A wonderful case study was Uber taking on the taxi industry and the waves this created among taxi companies and government institutions regulating the industry.
In a digital world, where change is faster than ever, assuming your business ecosystem is static is a sure recipe for disaster. Instead, we need to become much more cognizant of our business ecosystem and the role we play in it. We need to view the ecosystem as a malleable structure and understand what role we want to play. Based on that, we should execute our strategy to shift from our current to our desired position.
Also, significant changes to the ecosystem’s architecture often require a verticalization or higher degree of vertical integration while a keystone player takes on additional responsibilities to ensure that the end customer receives the intended benefits. Accepting the additional responsibilities often goes against the grain of successful companies in that they’ve traditionally been successful by focusing on their unique differentiating capabilities and leaving everything else to ecosystem partners.
Enacting changes in your existing business ecosystem is incredibly difficult for an incumbent as everyone, from your customers to your suppliers, is against rocking the boat. Still, ecosystems that don’t evolve get displaced by new ecosystems that come out of left field. And even the customers who were fighting your changes will happily change to the new ecosystem when there are significant gains and benefits to be had.
Both you and your customer are living in a complex, constantly evolving business ecosystem. Understanding the ecosystem and the forces operating within it and outside it, having a clear strategy to achieve a preferable position and proactively executing this strategy is critical for long-term survival as disruption always comes unexpectedly. The offerings you provide to your customers don’t operate in a vacuum but in an often surprisingly complex context. Failing to appreciate this may easily be the precursor to your disruption.