Ecosystem Strategy 101

FOR Ron Adner, Professor of Strategy and Entrepreneurship, Tuck School of Business

Q &A

You have said the disruption occurring in business today is very different from what came before it. Please explain. Disruption used to take place within industries — discount airlines, online brokerages, steel production. But today’s disruption breaks industry boundaries and redefines entire ecosystems. The digital age has so altered business activities that our traditional approach to strategy and competition has become nearly obsolete. Ecosystem disruption isn’t about new entrants coming into your market and doing the old job in a new way, but rather redefining what that job is There are multiple games being played simultaneously, so the new risk for leaders is that they could be trying to win the wrong game. Whether it’s in mobility, healthcare or finance, it’s about redefining the nature of the value proposition.

How do you define an ecosystem?

Interview by Karen Christensen

A business ecosystem is the network of organizations — suppliers, distributors, customers, competitors, government agencies and so on — involved in the delivery of a specific product or service through both competition and cooperation. Put simply, it is the structure through which partners interact to deliver a value proposition. If you think about the world of mobile payments, there are multiple approaches being deployed and each one is an alternative ecosystem. Both from an opportunity side but also from a threat side, there are pressures coming from many different directions into the same space. There’s a lot more to consider than the usual industry rules of head-to-head competition that we understood so well.

What does ecosystem disruption look like?

Take the automotive industry. Competition between companies has always been intense, but for a century, it was centred on the same set of well-understood goals. Today’s car makers are scrambling to create strategies that make

An innovation expert says industry boundaries no longer define who your rivals are.

QUESTIONS

sense in the redefined ‘mobility ecosystem’ that is being reshaped by companies like Tesla, Uber, electrical charging and promises of autonomous vehicles. There is a diversity of business models and partnerships that present a fundamentally different set of trade-offs.

Ecosystem disruption is not new, but the frequency with which firms are trying to create new ecosystems, and the number of ecosystems they are forced to participate in simultaneously, has picked up considerably. This is the next step in the digital revolution, and leaders need to understand what’s going on.

You believe the story of Kodak holds the keys to understanding the today’s challenge of transformation. Please explain.

Kodak’s saga is the exemplar of what we are getting so wrong when we look at modern competition. It’s the most over-studied story of modern failure, but it has been totally misunderstood. The story that everyone has been taught has Kodak failing because they could not overcome their internal inertia to transition from the world of chemical photo printing to digital photo printing. But this is 100 per cent wrong.

Kodak bet big and did transform into a dominant digital printing company: they became the number one seller of digital cameras in the U.S. and a top printer maker. But even as it managed the disruption in printing technology, it was blindsided as printing itself became irrelevant in a world of ubiquitous screens. Digital viewing replaced digital printing. Kodak was trying to beat HP and Lexmark, but the true danger came from the iPhone, Facebook and Instagram as they redefined the way in which images were consumed.

This is a different kind of disruption, rooted in what I call ‘value inversion’ — and it requires a new set of tools in order to see it coming. Kodak offers a stark demonstration that winning the wrong game is the same as losing. The point of revising the story is to show that any organization that doesn’t have the tools to see and understand the larger ‘game board’ is equally at risk of winning the wrong game.

How do you recommend companies go about defining their ecosystem strategy?

It starts with articulating the elements that underlie their value proposition — the value architecture. This is a new

approach to strategy that I introduce in the book. From there, think about how to construct an ecosystem that pulls it together. When you’re confronting change, which part of the ecosystem is that change impacting? The pressure is not going to be everywhere and all at once. If you can specify where exactly the pressure is, you can be smarter about creating an effective strategy for responding and taking advantage of the change.

Describe how Wayfair and Amazon illustrate this mindset.

The story of Wayfair is critically important because it shows how, yes, we have these massive ecosystem juggernauts, but a really smart understanding of value architecture allows a much smaller, focused firm to not just survive but thrive in the wake of a giant like Amazon.

From a traditional industry lens there would be no chance that Wayfair could survive; but if we understand the way in which they reconstructed their ecosystem, suddenly not only is it possible, but it’s sensible that firms in that situation can defend themselves quite successfully. That’s actually the subtitle of my book — How to Disrupt, Defend and Deliver in a Changing World. The way in which we think about business model offense and defense has to change.

In the context of ecosystem competition, what new skills are required of leaders?

The key leadership challenge that emerges in this scenario is the ability to align independent partners. There is always tension between an execution mindset and an alignment mindset. One isn’t better than the other, but these are different foci that are required in different contexts. If you’re operating in a stable context, the traditional notion of a high execution focus can serve you quite well. But if you’re in a setting where pieces of the puzzle are being re-aligned or are moving around, it’s way more important to focus on driving that alignment in a productive way. Achieving this requires a very different set of priorities and a different set of trade-offs. Rather than the noble virtue of putting an organization first with an alignment mindset, you have to put the coalition first in order to get things into place. The traditional military metaphor for business gives way to the diplomatic metaphor of ‘how can we bring things together?’ and ‘how can we keep them aligned as we move forward?’

The way we think about business model offense and defense has to change.

The Principles of Ecosystem Defense

PRINCIPLE 1: Modify your value architecture by recruiting and redeploying partners. Illustrative case: Wayfair versus Amazon

PRINCIPLE 2: Identify defensible ground by finding like- minded partners. Illustrative case: TomTom versus Google

PRINCIPLE 3: Discipline your ambition to sustain your defensive coalition. Illustrative case: Spotify versus Apple

Tell us about the ‘Ego-System Trap.’ Companies fall into this trap when they don’t recognize when their growth ambitions are taking them into a new ecosystem. Instead, they focus on expanding their position in the old ecosystem. We see this in the contrast between Apple’s success in expanding from smartphones to tablets to smart watches, and all the associated apps; and its stark failure to meaningfully impact health, education, payments, smart home and other transformational ambitions.

The ego-system trap arises when firms define their ecosystems around themselves, rather than their value proposition. This blinds them to the need to re-strategize the alignment of partners when they cross into new domains. For leaders, overcoming this trap depends on developing an ‘alignment mindset,’ which as indicated, requires skills that are more about diplomacy than authority. Shifting from a ‘company-first’ to a ‘coalition-first’ mindset can be a real challenge for traditional leaders.

In the book, you explain ecosystem defense by pointing to three David-versus-Goliath stories: Wayfair vs. Amazon; TomTom vs. Google; and Spotify vs. Apple Music. Why is defense so important in ecosystem competition?

Ecosystem defense is critical because ecosystem offense is everywhere. As I said earlier, Kodak was driven to bankruptcy as a result of collateral damage from a broader trend that they did not know how to see coming. Many firms, however, find themselves squarely in the sights of ecosystem disruptors who are very intentional about eating their lunch.

The notion of needing to confront an Apple, Google or Amazon in your home market is the new competitive nightmare. But there is a systematic way to respond: ecosystem defense must be pursued in a coalition. If you’re facing this new type of competitor that is bringing its own ecosystem into the game, you can’t beat them head-to-head. You have to recruit and redeploy partners, identify defensible ground, and discipline your ambition to sustain your defensive coalition. Wayfair, TomTom and Spotify each demonstrate a different principle of ecosystem defense, and collectively reveal the keys to success in a future of ecosystem-based competition.

Is there a simple way for leaders to determine if they’re ‘playing the wrong game’?

Anyone who is confronting an opportunity or a challenge that is not about change inside of their box but rather changing the boundaries of what their box is, is facing this world of ecosystems. It’s not going to be everybody, but most new growth initiatives and vastly more new pressures are coming from situations where boundaries are being redrawn. If you don’t understand this new world, you’re working at a massive disadvantage. Leaders need to rethink strategy and competition in a world where industry boundaries are no longer productive guides to defining who their rivals are.

Ron Adner is the Leverone Memorial Professor of Business Administration and Professor of Strategy and Entrepreneurship at the Tuck School of Business, Dartmouth College. His latest book is Winning the Right Game: How to Disrupt, Defend, and Deliver in a Changing World (MIT Press, 2021). To read the first chapter, go to ronadner.com.

Most new growth initiatives are coming from situations where boundaries are being redrawn.