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Definition

The Ecosystem represents the environment within which an enterprise or an enterprises’ business models participate. In a traditional enterprise with a pipe-based supply chain oriented business model (SIPOC – Supplier, Input, Process, Output, Consumer) the ecosystem is made up of parties including traditional partners and suppliers upstream and downstream along or within a supply chain or value chain. This can includes concepts such as partnerships, contractual relationships, supplier relationships, geographies, supply chains, industry value chains. In a platform based business model the same parties exist however their relationship with the platform business model tends to be looser and can be less contractual. Successful platforms focus on alignment of incentives across ecosystem participants. An enterprise with multiple business models can be engaged in more than one ecosystem.

While traditional pipe-based business models are structured around minimising transaction costs and maximising the profit that can be extracted from a value chain. Platform-based business models are typically focussed on growing the ecosystem and creating value for participants through a complex set of financial and non-financial value exchanges.

“Our philosophy is that we want to be an ecosystem. Our philosophy is to empower others to sell, empower others to service, making sure the other people are more powerful than us. With our technology, our innovation, our partners – 10 million small business sellers – they can compete with Microsoft and IBM.”

Jack Ma – Founder Ali Baba

Why it matters?

Understanding ecosystems is important for an architect. Understanding how a business model extracts value from a specific market provides the basis for many innovation efforts and/or operating model optimisation initiatives. Developing an understand of the choices and strategies and enterprise has made to integrate backward/forward along and value chain. In some instances choices to pursue a modular strategy e.g. Paypal & Payments shapes and or constrains an enterprises future strategies. Architects who ignore the ecosystem risk not understanding the strategic and tactical choices that shape past and future choices.

Details

Understanding the environment that a business model lives in is critical. Many of the factors that create or destroy opportunity are external to the business model. Having a frame to understand the environment is critical to creating value within business models.

Businesses make a number of decisions (explicitly and sometimes implicitly) regarding where they choose to create value. In classic value chain terms this involves integrating across 2 or more stages of a value chain. The alternative is to choose to be a modular player and offer a discrete service that can used by others in a modular manner e.g. payment providers. The decisions dictate priorities and shape investment decisions.

Pipe-based business model ecosystems

Twenty first century enterprises have evolved into world-wide interconnected networks balancing demand and supply. Network partners are highly interdependent. Chain complexity increases as each party in the chain increasingly relies and more and more partners for their success. Managing risk across the chain becomes a key consideration, concentration of power within the ecosystem of partners can have profound effects across the supply chain.

Platform-based ecosystems

Digitisation is enabling a different kind of model that we call a platform based business model e.g. Amazon (shopping), Aetna (healthcare) s ecosystem. Platform-based business models are designed around ecosystems. The focus of the platform moves from entities controlling resources to extract value to a relationship based model. Relationships involve 2 or more parties exchanging value. There is value in the relationship. Units of value are exchanged through the platform via channels or within contexts. In this model every ecosystem has potential value (energy) the platform exposes or unleashes that potential. Traditional ecosystems are often described as industry value chains. The ecosystem for any given consumer market is divided into three parts: Suppliers, Distributors, Consumers/Users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution.

Industry Creation Stories & Ecosystems

Ecosystems are created either implicitly or explicitly as new industries are born. The creation stories of industries is revealing, as new classes of product are create founders must choose the level of integration or modularity that they pursue.

  • Henry Ford and the care asked, “What would enable everyone to have a car”.
  • Steve Jobs and the computer – “What would enable everyone to have a computer”.
  • Akio Morita and the Walkman – “What would enable young people to have their own music”.
  • Kiichiro Toyodan and the Toyota Production System – , “How can a car be built without faults”.
  • Jeff Bezos and Amazon – “What would cause people to do their shopping online”.

Theory of the Firm & Ecosystems (abridged)

Enterprises exist to make decisions to maximize profits. Enterprises interact with the market to determine pricing and demand and then allocate resources according to models that look to maximize net profits. In traditional pipe-based enterprises the choice to perform a transaction within the enterprise or within the ecosystem is a factor of the cost of that transaction and the need to control that transaction. Costs arise from demand based pricing, search costs (i.e. finding and sourcing the party to perform the transaction and determining if this is the lowest cost, negotiation costs required to establish acceptable and economic terms along with associated legal costs. Finally policing and enforcement costs ensuring parties  sticks to the terms of the contract, and taking appropriate action if required to remediate issues.

Integration -or- Modularity

Integration

Enterprises building complex products or services must choose what level of integration is required to create and support the product or service. There is typically some level of integration required even if the enterprise is pursuing a modular strategy e.g. Apple iPhone is integrated however Samsung make the screens (component) and Foxconn builds the phone (manufacture).

Ecosystem Development involves exploring the parties in the ecosystem, the relationships between the parties, the motivation of parties within the ecosystem to

Tools & Practices

MIT Ecosystem

Usage: Strategy Development/Clarification, assisting management in understanding strategic choices, consequences and organisational impact.

The horizontal axis of the quadrant is business design – who controls key decisions, value chain and ecosystem as the options.

The vertical axis is the depth of knowledge of your end customer – do you know your customers name or just an IP address, do you provide or use a customer identity, do you know about purchases and preferences, are the customers goals and motivations known. Deep knowledge of the end customer enables your enterprise to  aggregate around customer needs and own customer relationships, thereby increasing customer engagement and retention.

The 2×2 leads to 4 possible business models depending on 2 strategic choices.

Supplier

Suppliers tend to have incomplete knowledge of their end customers/users. Suppliers are typically operating within some other parties value chain e.g. CPG companies selling through distributors and retailers are at arm’s length from customers.

Omni-channel business

Omni-channel businesses deal directly with their customers providing products and services though a variety of channel both physical bricks and mortar and digital. Customers can engage consistently across any channel and move seamlessly across channels. The goal is to maintain engagement and create a better customer experience. Banks, Telcos and Retail have engaged heavily in this type of strategy.

Modular producers

Modular producers take one transaction of set of transactions performed across a value chain and deliver that product or typically service at a higher level than any other ecosystem participant could achieve on its own. Modular providers specialise and typically develop specific business capabilities that are non-core to other business models e.g. PayaPal and payment processing, Okta and identity. The same modular producer can be used by many parties within an ecosystem.

Ecosystem drivers

Ecosystem drivers want to become the destination for a subset of their customers in their space. They provide a platform for the participants to do business that can be more (e.g. Google) or less (e.g. Apple) open. They leverage their brand to attract participants, ensure a great customer experience and offer one-stop shopping providing their own products, complementary products and sometimes competitor products. An ecosystem driver is typically the only enterprise in the ecosystem that sees all the data and uses the insights to make the destination increasingly attractive.

Architecture Impact

Strategic choices to position an enterprise in any one of the four quadrants will have architecture ramifications. Omni channel businesses will have to contend with the vast array of interaction technologies that are emerging, along with the emergence of intelligent agents capable of interacting on behalf of a customer. Modular producers in a digital world must focus on developing world class APIs in order to support ease of integration. In either case quality attribute requirements relating to security, performance and availability requirements all create interesting opportunities to

PDT Ecosystem Canvas, Motivation Matrix

Usage: Platform Design, Mapping, Exploration

The set of canvases developed by Simone Cicero is part of the Platform Design Toolkit. The toolkit is a design toolkit focused purely on platform design as distinct from business model design. The differences may appear small but the design implications of designing for a network versus a pipe are profound.

Step 1: Ecosystem Canvas

This canvas is intended to help you understanding the actors in an ecosystem. Each actor (entity) has a role to play

  • Platform Owners – the entity who owns the platform e.g. Amazon
  • Partners (Pa) – are more strategic and closer the owner
  • Peer Providers – offer services via the platform and benefit from platform enabling services to support them
  • Peer Consumer (Pc). – consume services via the platform and benefit both from the consumed service but also from the platforms ability support them in at points through the consumption life cycle.

Step 2: Platform Motivation Matrix

Each actor has a set of motivations that result in participation on the platform. The matrix allows the platform designer to explore the motivations. The resulting value opportunties resulting from the platform help shape the core and ancillary value propositions offered through the platform.

Expection

Pillar

Foundation

    • Awareness of ecosystems, the difference between value chain and ecosystems
    • Understand demand and supply fundamentals within an ecosystem

BTS

Associate

    • Ability to articulate the various roles within an ecosystem
    • Understand the strategic choices made by organisations in choosing how to engage in an ecosystem
    • Differe

BTS

CITA-S

    • Understand the fundamentals of ecosystem analysis and business model/platform design
    • Ability to analyze existing organisations and map ecosystem, value transactions and perceived motivations

BTS

CITAP-P

      • Facilitate and participate in the analysis of platforms
      • Participate in supporting an organisations strategic decision-making with relation to ecosystem development. – Business Architect, Enterprise Architect

BTS

Resources

https://cisr.mit.edu/research/current-projects/digital-ecosystem-drivers/

  1. Weill & S. L. Woerner, “Thriving in an Increasingly Digital Ecosystem”, MIT Sloan Management Review, Summer 2015, Vol. 56, No. 4, pp. 27-34, 16 June 2015. P. Weill & S. L. Woerner, The Next Generation Enterprise: Transforming for a Digital Economy, Harvard Business School Press, forthcoming 2017.

Platform design Toolkit

Platform Revolution – Geoffrey Parker

Platform Book

Stratechery  – Aggregation Theor

Theory of the Firm Coase

Dediu   -Modularity V Integration 2 strategies

Machine, Platform, Crowd. -McAfee, Andrew

CEB Articles

HBR Articles

Sloan MIT Articles

EBR Articles

Accelare

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