Why Do Most Business Ecosystems Fail?
An old integrated firm —> business ecosystems [BE], i.e. dynamic groups of largely independent partners working together to deliver integrated products / services.
Most of the BEs are built around digital platforms.
Many BEs in the crisis were used to coordinate healthcare needs, produce medical equipment, track patients, etc.
The Truth About Ecosystems
Very convenient as a collection of firms can beat a single integrated entity.
Less than 15% of BEs succeed. (i.e. sustainable in the long run)
o More than 60% of the $100B investments into VCs went towards funding BEs p/a
o i.e. $50B of investment annually is lost.
Why Are Successful Ecosystems So Rare?
Challenging the value of a single player by sharing the value between many cooperative contenders.
External dealmaking is more important than internal perfection and value capture.
Value distribution is a challenge and a struggle. [MK: the most popular/wrong one is the one where every single link in a chain has to be profitable.]
However, ecosystems can’t be reliably planned, there’s a huge luck [right actors, right time] component to them.
o They have to be flexible, however, to change the setup of the participants.
Scaling needs to be thoughtful: balancing the supply/demand during launch, preventing the explosion of costs (if there are network effects), protecting quality during growth, defending against competitors and copycats.
Failures are very costly. Winner takes all, but after winning the marginal costs to attract and service a customer become low.
Focus on scale, then profitability —> failure may not be obvious for a long time.
Emergence of copycat ecosystems funded by VC money.
How do Ecosystems Fail?
85% of the reason – bad design (ignoring or misreading the context), 15% - bad execution.
An ecosystem value prop is a: function of the size of the market friction it addresses, the share of the friction that can be eliminated by the ecosystem solution, and the willingness of customers to pay for it.
Insufficient problem to solve (10%). Also, are the transaction costs worth optimizing?
Wrong ecosystem configuration (18%). Delivery of the value prop —> define the right activities and partners, roles and responsibilities. Orchestrator (coordinates members, defines standards and rules, arbitrates conflict). Initial config: the minimum number of parties for delivery. Inability to organize —> failure. (ex: Sony e-reader vs Kindle)
Wrong governance choices (34%). Replaces traditional control with indirect. Standards, rules and processes defining the ecosystem’s [in]formal constitution. Regulate access (who, how), participation (decision rights) and commitment (investments, co-specialization). Challenge: find the right level of openness. Speed vs control, more control == more downside protection. More open == faster growth. Copycats may miss out the decision logic of a leader (ex: Google’s social network, one-way following a-la Twitter —> low interaction)
Inadequate monetization (5%). Balancing the 3 competing objectives: increasing the overall size of the pie, enabling ecosystem partners to earn money and stay inside, capturing own fair share of the value. Need to subsidize the part that’s less willing to participate (transaction vs access, rebates, etc). (ex: eBay in China charged for transactions vs the traditional way of ads à failure)
Weak launch strategy (8%). Chicken and egg problem of building scale and participation. Focusing on the core value prop and starting small, dense network vs large network to ensure quality of interactions, invest into the side of the market difficult to convince to join (usually supply). Roadblocks: large investments from members, high competition, low barriers to entry.
Weak defensibility (10%). 5 basic mechanisms of attack: multihoming (members belong to 2+ competing ecosystems [banks, social networks]), disintermediation (users can deal directly without the platform), differentiation (a new platform offers distinctive features), ecosystem carryover (expanding in a neighbouring domain) and backlash (incumbents, customers, etc challenging the bus model or practices).
o Solutions: increasing switching costs, designing lock-ins, incentivising customer and supplier loyalty, designing for social acceptance and not just legal compliance.
Bad execution (15%). Poor IT security, acquisitions, fraud [hello Wirecard], complacency.
When do Ecosystems Fail?
Failure is apparent much later —> very costly.
Launch: focus on developing a strong value prop, finding the initial ecosystem design. 30% companies fail here (insufficient problem, wrong config), 3.5 years, $16m writeoff on average !!!
Scale: increasing the # and frequency of interactions to grow toward a dominant market position. 45% failure rate (wrong governance, weak launch strategy). Often – wrong level of openness.
Maturity: increasing loyalty of customers and suppliers, erecting barriers to entry. 20% failure rate (bad execution, wrong governance, weak defensibility) By then: 5 years passed, $79m invested on average.
Evolution: expanding the offering, continuous innovation to thrive and survive long-term. 5% failure rate (bad execution, weak defensibility) Median survival time: 25 years.