Companies can meet the challenge of disruptive innovation by adopting a new “ecosystem” strategy, says Professor Peter Williamson.
Companies can meet the challenge of disruptive innovation by adopting a new “ecosystem” strategy that attracts a wide range of partners that help all parties innovate and grow, says a new book, Ecosystem Edge, by Professor Arnoud De Meyer of Singapore Management University and Professor Peter Williamson of Cambridge Judge Business School.
Managers need to leave old “command and control” approaches behind in favour of a strategy of boosting learning and innovation by attracting collaborators to strengthen their network, says the book to be published on 14 April by Stanford University Press.
To profit, such ecosystem creators need to establish efficient “tollgates” to collect revenues when partners tap a “keystone” contribution of the ecosystem leader – the way that Cambridge-based chip designer ARM collects royalties or license fees from the 90 per cent of mobile phones globally that use its power-saving chip designs.
“A successful strategy, in the future, will depend on how well you proactively lead your ecosystem, by engaging with different partners who bring fresh competencies and capabilities that will fuel innovation and transform your organisation,” says the 224-page book, Ecosystem Edge: Sustaining Competitiveness in the Face of Disruption.
“In the past, scale economies were driven by your company’s size. Today and tomorrow, the benefits of scale will increasingly depend on the total sales of your ecosystem, including both you and all of your partners.”
Ecosystem Edge distils the lessons from eight case studies of companies that have successfully built such ecosystems: Chinese e-commerce giant Alibaba, Amazon, ARM, healthcare software firm athenahealth, data provider Thomson Reuters and its affiliate Refinitiv, French software firm Dassault Systèmes, jet engine maker Rolls-Royce, and The Guardian media organisation.
“Ecosystem CEOs seek to launch their businesses on another trajectory, going beyond what anyone in the company can imagine. Traditional leadership approaches based on command and control and traditional planning systems are therefore ill-equipped for that challenge. A different approach is required,” the book says.
The book was inspired by a realisation that, unlike Silicon Valley tech firms chose a classic supply chain model, subcontracting component development, innovation in Cambridge is often based on an interdependent network of peers akin to a biological ecosystem. Arnoud De Meyer is a former Dean of Cambridge Judge Business School, and Peter Williamson is Honorary Professor of International Management at Cambridge Judge.
Some of the book’s case studies showed:
Alibaba, in creating an ecosystem that now includes an online marketplace, electronic payment and cloud computing, abandoned existing profit streams such as fees to join its platforms; it also resisted the temptation to encroach on its partners’ businesses such as app development. “Fundamental to Alibaba’s thinking was the belief that if it could create value for the end customer, it would then find a way to earn money for itself.”
ARM, which started in 1990 with 12 engineers in a 14th Century barn near Cambridge, showed that startups and other smaller companies can grow ecosystems. The company, bought by Softbank for $32 billion in 2016, successfully mobilised a global network of knowledge partners and has built such close ties with its smartphone and computer hardware partners that they would lose out if they switched chip designer.
Thomson Reuters encouraged fintech startups to participate in its Eikon applications studio by opening up its development system and making the data “shareable by default”, demonstrating that this ecosystem could innovate in ways the creator may not have even imagined.
Amazon initially planned to build a cloud-based storage platform for itself but instead created its Amazon Web Services ecosystem by opening it up to other companies. In doing so, it was able to differentiate its Cloud offering by helping partners create a complementary set of value-added services including software solutions, technical consulting and implementation support.
The Guardian media organisation became one of the world’s most popular news portals by “harnessing the knowledge and capabilities of its partners”, while allowing its content to be embedded into partner sites and thus making them part of this ecosystem.
With bottom-line impact firmly in sight, the book focuses on the necessity of not only building but also monetising an ecosystem, citing the failure of IBM to monetise its personal computer ecosystem after surrendering control of profitable tollgates to others.
“IBM may still have been leading the ecosystem, but it had no ability to successfully monetise it,” the book says. “It was a cruel irony that at least two of its major partners, Microsoft and Intel, remained highly profitable while continuing to rely on IBM’s leadership for many aspects of the ecosystem.” After losing hundreds of millions of dollars on PCs over several years, IBM sold its PC business to China’s Levovo in 2005.