How do you steady the course of your IPO journey in a changing landscape?
How can boards convert sustainability from a wish to a winning reality?
EMEIA board priorities 2024
Select your location
No search results have been found
Local sites
EY Global Alliance and Ecosystem Leader
Passionate about improving the pace and scale of value creation. Fearless business strategist. Former entrepreneur and dot-commer. Unabashed binge watcher. Traveler, foodie and father of three.
Ecosystem is one of those terms that if you ask one hundred people what it means, you will probably get one hundred different answers, most of them in a similar zone, but the variation would be significant. The first time I ever heard the word ecosystem was probably in a grade school science class where we studied the “ecosystem of the ocean”.
Ecosystem is a concept that recognizes, in any closed system, the members of that system must work with and around each other to keep the system stable, ideally optimizing the collective benefit. We see plenty of evidence in the natural world of how a balanced ecosystem benefits all participants – and how destructive imbalance in an ecosystem can be.
Since we work in the business world, I felt it would be useful to make a more precise definition of ecosystem relative to the goal of business value creation across multiple parties. Thus, we define a “business ecosystem” as follows:
“A business ecosystem is a purposeful business arrangement between two or more entities (the members) to create and share in collective value for a common set of customers. Every business ecosystem has participants, and at least one member acts as the orchestrator of the participants. All members in a business ecosystem, whether orchestrators or participants, have their brands present in the value propositions.”
There is a fair amount to unpack in this definition. The requirement that the business ecosystem members are seeking to create value for a common set of customers recognizes that without common customers, the members are simply targeting value at each other. The point of our definition is that business ecosystems exist to create a higher level of value collectively than the members can create individually considering time, capital, brand permission, market access and other real-world constraints. The members of a business ecosystem sell with each other to common customers. They may also sell to each other in other contexts, but that activity is not part of the business ecosystem.
The concept that a business ecosystem requires one or more members to act as the orchestrator recognizes that there must be a party responsible for the structure and performance of the business ecosystem, including governance, commercial arrangements, go-to-market coordination, value creation mechanisms, value sharing mechanisms, and risk management. Going back to my grade school example of the ecosystem of the ocean, there is no orchestrator of the ocean’s ecosystem. That ecosystem occurs naturally, rebalances as change is introduced, and does not exist to serve a common purpose for its participants other than to seek stability amongst them. Business ecosystems have an overarching purpose to create collective value for common customers, and thus require orchestration.
Finally, the requirement that all brands be present is how we draw the line between ecosystem business models and strategic supply networks. Let’s illustrate this with a simple real-life example. If you drive a car, you know your car has brakes, but you probably don’t know where your car manufacturer sourced those brakes. Those brakes were sourced to your car’s manufacturer through its strategic supply network. However, you might drive a car with “Brembo” brakes, and the fact that it has branded brakes may have added to your perception of the value of the vehicle leading up to your purchase. That is where Brembo crossed the line into a business ecosystem relationship with the car manufacturer. Our view has been that a key enabler of a business ecosystem is the collective value of the brands of the members, particularly that of the orchestrator, though the participants’ brands are important as well. Hence the stipulation that all brands are present in the value proposition.
As noted above, to get value from an ecosystem business model, it is important to have an ecosystem function that enables both participation-in and orchestration-of business ecosystems. There is a certain amount of general overhead to enabling business ecosystems, and each business ecosystem will have specific costs relative to the facts and circumstances of the commercial arrangement. As companies become mature at this function, they will be able to calculate these marginal costs which can be significant. It is important to maintain strict cost discipline as it is entirely possible that the incremental value creation that is realizable in a business ecosystem may not justify the marginal cost.
Ecosystem is one of those terms, like digital, that is rapidly becoming ubiquitous across the business landscape. We see the university and analyst communities increasingly writing about ecosystem. We see the highest valued companies in the world are increasingly digital natives who employ ecosystem business models to efficiently and quickly generate customer value. In my job, I am increasingly asked by clients how they can do more to create value from ecosystem in their companies.
I think the evidence is now clear that we are entering an era of ecosystem where most companies will heavily utilize ecosystem business models to drive innovation and the pace and capital efficiency with which they create customer value. Said differently, companies will increasingly favor the “partner” option in the “build, buy, partner” decision framework. The pace of change, demand for innovation and the democratization of capital through private markets make it increasingly difficult to keep up. Building can take too much time and buying can take too much capital. Meanwhile, the traditional technical and operational hurdles that made partnering models difficult in prior times have been dramatically lowered by the cloud economy.
I don’t mean to suggest that cloud is some sort of magic bullet that allows any company to jump into the ecosystem pool. Even with cloud, it is not easy to create value at pace and scale through partnering models. Most companies are not structured to partner efficiently, nor are they culturally aligned. Companies that are proficient at “building” typically have very mature R&D and innovation functions that seamlessly scale into full production of new products and offerings. Similarly, companies proficient at “buying” typically have very mature corporate development and M&I functions to identify and integrate new entities. But outside of certain industries, like the software industry which has been utilizing ecosystems for decades, there are very few companies that have a mature ecosystem function, let alone a broader operating model structure that is optimized for ecosystem value creation.
The good news for companies who wish to utilize ecosystem business models, but otherwise lack the structures and maturity, is that there is a growing body of leading practices and an increasingly large workforce that understands the practical elements of building and operating an effective ecosystem function. Companies that incorporate ecosystem business models into their corporate strategies can now feel more confident that they can successfully develop the capability to execute those strategies. That wasn’t the case almost four years ago when I took my Ecosystem Leader role at EY. It was a lot harder back then.
We’ve learned a lot of lessons in the last four years that have me optimistic that coming out of COVID, we are going to see an explosion in value creation around the world. I firmly believe that the future belongs to those companies who build ecosystem business models into the structure of their value creation strategy. In my next article, I’ll be sharing some of my thinking on how we all can benefit from a world that increasingly views ecosystem as a path to economic advantage, and more specifically, how we can structure ourselves to take advantage of it. Stay tuned for more.
About this article
EY Global Alliance and Ecosystem Leader
Passionate about improving the pace and scale of value creation. Fearless business strategist. Former entrepreneur and dot-commer. Unabashed binge watcher. Traveler, foodie and father of three.
Legal and privacy
Modern slavery statement
Connect with us
My EY
Our locations
Site map
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
Facebook
LinkedIn
Twitter
YouTube
EY | Assurance | Consulting | Strategy and Transactions | Tax
About EY
EY is a global leader in assurance, consulting, strategy and transactions, and tax services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
© 2020 EYGM Limited. All Rights Reserved.
EYG/OC/FEA no.
ED MMYY
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
In addition to cookies that are strictly necessary to operate this website, we use the following types of cookies to improve your experience and our services: Functional cookies to enhance your experience (e.g. remember settings), Performance cookies to measure the website’s performance and improve your experience, Advertising/Targeting cookies, which are set by third parties with whom we execute advertising campaigns and allow us to provide you with advertisements relevant to you, Social media cookies, which allow you to share the content on this website on social media like Facebook and Twitter.
You may withdraw your consent to cookies at any time once you have entered the website through a link in the privacy policy, which you can find at the bottom of each page on the website.
Review our cookie policy for more information.
Customize cookies