To execute an ecosystem strategy, leaders must understand how to make an ecosystem work—in particular, this means not only offering a seamless value proposition but also doing the hard work of brokering attractive partnership arrangements and ensuring value capture. These two seemingly opposed, yet interlinked forces form the Yin and Yang of ecosystem success. All successful ecosystems have a strong Yang—a value proposition that rests on seamlessly integrating various services for a customer. Underpinning this simplicity for the customer lies a less visible but critically important challenge of careful strategic planning: the ecosystems’ Yin. This refers to building the intricate, strategically calculated web of relationships that make an ecosystem work.
Business ecosystems are becoming all the rage. In my recent HBR article, I argued that to embark on shaping an ecosystem strategy, leaders should tackle key questions, including: How can you help other firms create value? What role should you play—orchestrator, partner, participant? How can your organization adapt? Yet these questions only get you to the starting line. To execute an ecosystem strategy, you must also understand how to make an ecosystem work—in particular, this means not only offering a seamless value proposition but also doing the hard work of brokering attractive partnership arrangements and ensuring value capture. These two seemingly opposed, yet interlinked forces form the Yin and Yang of ecosystem success.
All successful ecosystems have a strong Yang—a value proposition that rests on seamlessly integrating various services for a customer. Consider Tencent, whose WeChat platform bridges the gap between Chinese mobile subscribers’ lives and their activities—from social media to payments. In Europe, Tencent built WeChatGo, which provides a pre-paid SIM card that saves Chinese customers from costly roaming charges—but also offers an interface connecting Chinese tourists to local shops, museums, and attractions. It offers them discounts in the app and delivers a seamless and intuitive experience.
Another example is Hyundai’s BlueLink, which allows Hyundai owners to manage their cars with their mobile phones. Through the BlueLink ecosystem, owners can have their car washed, or order groceries to be delivered to its trunk while it sits in a parking lot.
This article is one in a series related to the 11th Global Peter Drucker Forum, with the theme “The Power of Ecosystems” taking place on November 21 & 22, 2019 in Vienna, Austria. #GPDF19
Then there’s PingAn, the world’s most valuable insurance company. Its strength today rests partly on its move into healthcare via Good Doctor, which 300 million Chinese customers rely on to help them manage their healthcare. In Europe, Babylon Health, a smaller, entrepreneurial venture, similarly offers seamless access to healthcare services, integrating AI diagnosis, links to healthcare providers and pharmacy services.
In all of these cases, ecosystems—groups of companies linked (though mostly not owned) by an orchestrator—provide a new, integrated, customer-focused solution. It’s not just a bundle of “what we do,” foisted on the customer. It’s about what consumers actually need; it’s not about the company’s ego.
Underpinning this simplicity for the customer lies a less visible but critically important challenge of careful strategic planning: the ecosystems’ Yin. This refers to building the intricate, strategically calculated web of relationships that make an ecosystem work. When Tencent set up WeChatGo in Europe, it contracted with KPN, the Dutch telco operator, to obtain European SIMs with pre-paid airtime that Tencent could send to Chinese tourists before they even stepped on a plane. Then, Tencent built an entire platform around KPN, hammering out deals with European retailers and attractions to make their offering truly valuable—both to Chinese tourists and those who wished to serve them.
PingAn, meanwhile, has a complex set of relationships with hospital providers: It owns just a few, and it brokers collaborative arrangements, shares revenues, and creates standardized collaboration templates for the rest. Similarly, the success of Europe’s BabylonHealth rests not merely on its intuitive user experience, but also on strategic relationships.
This web of relationships requires straddling sectors, countries, and modes of engagement. It obliges ecosystem orchestrators to share revenues—typically, starting low (or even negative) as the ecosystem vies for customers, and then grabbing a bigger slice of the pie as it grows. The success of an ecosystem often depends on multiple arrangements: revenue share deals, join ventures, minority or majority participation, and M&A. And it demands a strong focus on internal KPIs within organizations that engage in ecosystems, to ensure strategic alignment.
Of course, companies can’t just build a system that benefits customers and aligns with partners. The orchestrator must also derive some value—sooner or later. Some ecosystems generate cash. Others rely on building future success by increasing customer stickiness, facilitating growth, or heightening excitement for the customer. But, ultimately, all ecosystems need to create some tangible value for the orchestrator—a requirement that may be forgotten in a world where funding flows freely and Private Equity dry powder creates competition for investable opportunities, where platforms are the flavor of the day.
Consider WeWork, the co-working space venture. It burst into the limelight in a blaze of pizzazz and excitement, offering an alluring proposition (Yang) for its tenants and attracting partners to provide community, support, and complementary services. A big problem is that its ecosystem strategy and business model (Yin) remain unclear. While WeWork can clearly create growth, its ability to drive positive cash flow going forward is uncertain. Customer excitement and complementor buy-in, alas, are necessary but not sufficient.
This imbalance crops up because we’re drawing the wrong lessons about what makes ecosystems work. A few, atypical platforms, like Google or Facebook, can impose such powerful lock-in that once an ecosystem achieves critical mass, the orchestrator can rule it as they wish. They can charge what they want and turn ecosystems into cash cows. In other words, an attractive value proposition to the customer (Yang) is enough to secure excitement of collaborators and power over final customers. Yang, in these few cases, assures Yin, and drives business success.
However, most ecosystems don’t work that way. Uber is finding this out the hard way, with growth begetting losses and no end in sight. Riders are a fickle lot; they are not locked in — and neither are drivers, who can multi-home. That’s why Uber, emulating Grab, is broadening out, moving into food delivery, transport, and lifestyle. By doing so, it’s trying to improve its value proposition (Yang) by offering customers more value and becoming a super-app. Yet it is also trying to rebuild its ecosystem strategy and value capture approach (Yin), hoping to strengthen customer lock-in and improve its margins by broadening up. A bold move, with the jury still out.
As the world of ecosystems matures, we will see both impressive success stories and spectacular failures. These stories will illustrate that we need both the customer value proposition and the ability to work with partners and add value for the orchestrator. The two have to fit together, complement each other, and co-evolve in harmony, as Taoism suggests. It’s time for a new philosophy of strategy-making: Successful ecosystem strategy means shaping a Yin that matches your Yang.
This article is part of a series connected to the 11th Global Peter Drucker Forum.
read more at http://hbr.org by Michael G. Jacobides