Digital Ecosystems: Do Not Do It Alone!

Digital ecosystem strategies allow companies to leverage their strengths and pursue network effects – but to make it all work, enterprises must embrace a simple mantra: "Don't do it alone!"

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As software becomes an increasingly large part of an enterprise’s external expression, traditional physical ecosystems—such as suppliers, resellers, and retailers—need to be supplemented, and in some cases supplanted, by new software ecosystems.

Consider Walgreens, a customer of my employer, Google. To interact with customers, Walgreens doesn’t merely operate physical stores and provide first-party apps and websites. On the contrary, it also expresses core services—such as filling prescriptions or ordering photo prints—as APIs. This enables developers and partners to easily integrate Walgreens services into their own products, which in turn enables Walgreens to extend its brand presence into ecosystems it neither owns nor had to build.

As my colleague Bryan Kirschner has noted, the implications of this shift are profound, creating entirely new paradigms around value creation and supply and demand. But to maximize ecosystem opportunities, CIOs must embrace a new mantra: “You don’t have to do everything alone.”

Digital vs. Traditional Ecosystems: Understanding the Difference

A traditional enterprise might view its ecosystem strategy and perceive itself as the center of a supply and demand ecosystem, in other words, an attempt to leverage its strengths on one side to stimulate the other—e.g. using an awesome supply network to catalyze demand or utilizing tremendous demand to build a stronger supply network.  

If this viewpoint constitutes the enterprise’s entire plan, it’s likely to be short-sighted. A more comprehensive and useful model might take a more distributed perspective on ecosystems, one that enables numerous strategies that would have been impossible under the traditional model.

Digital ecosystems let enterprises transcend limitations in their core competencies. If an enterprise is adept at generating demand via traditional ad buys but inexperienced generating viral demand, it can fill the gap by making its software capabilities available in ecosystems where viral network effects are more common, such as social media or mobile app ecosystems. Magazine Luiza, a large retailer in Brazil, leverages the Facebook ecosystem through its Magazine Voce program to generate demand for its capabilities, for example.

Ecosystems can also increase the value of an enterprise’s capabilities. It’s one thing if a company possesses superior photo processing technology, for example—but it’s another thing if the company makes that technology available to other apps. In the first case, the technology’s value is limited to whatever mechanisms the enterprise already possesses to interact with end users. In the second case, the company can tap ecosystems such as iOS and Android to make its IP more ubiquitous and valuable.  

A key player in the above strategy is a third-party developer. Walgreens, for instance, delivers services to iPhone and Android users through third-party developers—developers who build end consumer photo editing apps or wellness apps or whatever apps benefit from Walgreens’ capabilities (which are expressed as APIs).  

Mastering direct demand (Magazine Luiza) or indirect demand (Walgreens) positions an enterprise to expand beyond its core competencies and resources—leading to a larger variety of apps and use-cases and, in the end, increasing the demand for an enterprise’s core services, which, in turn, increases the top-line.  

Small Tradeoffs for Big Victories

Ecosystems are not all wine and roses, of course. Increased supply or demand can come with a loss of control, and a decreased benefit per transaction. The hope, of course, is that the increase in demand more than compensates for these two potential negative effects.  

Profit margins may be lower when selling through ecosystems, for example, but because the brand can reach many more consumers and generate more demand than it otherwise would, the ecosystem is still the winning play.

Entering Ecosystems

Broadly speaking, to participate in other ecosystems, an enterprise must essentially syndicate its software capabilities. The best syndication approach is arguably APIs, though apps represent another model. Either way, the syndication occurs by wrapping the API or app in the structure of the other ecosystem.

If an enterprise wants to participate in a cloud ecosystem, such as AWS, Azure, or Google Cloud Platform, the enterprise should list its services in the cloud provider’s marketplace. But listing along is not sufficient—the syndicated software capabilities must still be designed and delivered to encourage developer adoption.

For example, if a company licenses its software capabilities via monthly subscriptions but wants to enter an ecosystem in which developers are accustomed to pay-as-you-go models, the company may need to convert its licensing model to match developer expectations. Beyond licensing, the software capabilities to attract developers require (at the very least) the following:

  • An attractive API (for developers) backed by a useful service (for the developer’s customers, e.g., great and ubiquitous photo printing capability).
  • Presence in a place with a vibrant ecosystem of developers (e.g., Android and iPhone for consumer apps, and top cloud platforms for enterprise developers).
  • Excellent business terms (e.g., a referral program, or even marketing of the developer’s app).

The payoffs of a well-conceived and well-executed ecosystem strategy can be tremendous — but to succeed, enterprises must embrace a “give up control to gain revenue” mindset. Leverage ecosystems but do not do it alone!

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