By Jeff Wray and Greg Sarafin
To retain market leadership, CEOs seeking to accelerate innovation in their organizations often find themselves at a crossroads: They must decide whether to build, buy, or partner. In response, a growing number of CEOs are embracing ecosystem business models—and with good reason.
Ecosystems make up an average of 13.7% of the annual revenue of organizations using at least one ecosystem business model, according to a recent EY study, as well as driving 12.9% in cost reduction and generating 13.3% in incremental earnings. Beyond the numbers, ecosystems offer organizations clear benefits, such as greater access to technical capabilities talent and assets.
Despite these benefits, however, ecosystem business models can be contractually, logistically, and commercially complex, with structures that are often unclear to new participants. These challenges multiply for CEOs who are uncomfortable being in a partnership arrangement where they can’t be in the driver’s seat.
The real questions CEOs should ask themselves are:
- Are we ready for a mindset change?
- Can we cede control, trusting our partners within a defined ecosystem business model?
- Are we prepared to share the limelight to gain the greater benefits of a united value proposition?
Many types of ecosystems
Organizations looking to access new growth opportunities with an ecosystem approach, as opposed to building it themselves or buying a company, need to identify the “right” ecosystem with the right arrangements and the right participants for the business goals they are trying to achieve.
Three of the seven business models for creating ecosystem value are orchestrated marketplaces of large tech companies; setups that allow competitors with differing footprints to join forces, such as airline-loyalty alliances; and value-chain integration, such as Insurwave, a blockchain-based shipping insurance ecosystem built in conjunction with the EY organization and other collaborators.
The benefits of ecosystems
Building, buying, and partnering are not necessarily mutually exclusive. Ecosystems are powerful for organizations testing new waters, as they offer a comparatively safe environment for experimentation with limited financial commitments. Organizations can also use ecosystems as a pipeline-development strategy in tandem with mergers and acquisitions.
Ecosystems are about more than just growing revenues by accessing new growth opportunities. They allow firms to grow their multiples due to the capital- and cost-efficient way they access these opportunities using the expertise of their ecosystem partners. Ecosystems generated incremental earnings of ~12.9% and enabled cost reduction of ~12.9%, according to the EY Ecosystem study.
Barriers to an ecosystem mindset
Despite their intent, some organizations struggle to understand how to use ecosystems to drive growth. The struggle stems from a narrow understanding of what an ecosystem “should” look like, based on preexisting industry norms, when the organization has already tested the obvious options and found and implemented the most promising variants.
However, to stay ahead of the innovation curve, firms need to look at options they have not explored. Companies need to think bigger and bolder by looking at all seven ecosystem models, not just at those they are most familiar with. Each organization needs to investigate which one is best suited, based on the desired business outcome.
In addition, organizations need to shift their focus to concentrate on the logic and governance of the ecosystem they are orchestrating or participating in, instead of just thinking about finding the right partner.
In sports, a winning team is not necessarily a set of the best players, but of those who work well together on a defined game plan to reach a common goal. Most teams require a captain—an orchestrator. The rest of the team play vital roles, but they adhere to the common standards defined by the orchestrator.
This approach—where an orchestrator sets the common standards, but the niche roles are enacted by the rest of the team—can make sense when firms with niche capabilities are accessing new areas of growth, or where they and their competitors are both aiming to orchestrate ecosystems but clients are keen on avoiding overreliance on a single supplier.
In this scenario, CEOs need to ask themselves, “If I can’t drive it, am I willing to take a back seat to access the growth I see in this new opportunity?”
Implications and next steps
To make the most of ecosystem opportunities, CEOs and C-suite leaders should consider the following steps:
Take a conscious look at the alliances and partnerships you and your competitors are a part of. Identify any patterns and ask if your organization is sticking to the mold that’s most prevalent in your industry—or if you have explored the art of the possible in the ecosystem strategy.
Ask yourself, “Am I just taking smaller comfortable steps that are close to my core business, or am I ready to take the leap of faith for broader growth opportunities?” When thinking about growth strategy, expand your horizons. Rethink how you have been considering your strategy and whether to pivot.
Revisit growth priorities you may have discarded. Were they set aside because they couldn’t be unlocked with your current value chain structure? Can a suitable ecosystem change that?
Learn to let go! Embrace the opportunity to enter attractive new growth vectors where your organization might not be best placed to lead the charge on its own but can make a valuable contribution to a broader value proposition.
Jeff Wray is Global EY-Parthenon Leader.
Greg Sarafin is EY Global Alliance and Ecosystem Leader.
Harvard Business Review.