"It may be hard for an egg to turn into a bird: it would be a jolly sight harder for it to learn to fly while remaining an egg. We are like eggs at present. And you cannot go on indefinitely being just an ordinary, decent egg. We must be hatched or go bad." C. S. Lewis
This article highlights the relevance of new business models and ecosystems in the knowledge-era economy. We begin with an introduction then argue that the shift in what is valued drives the need for new business models. The third section provides examples of innovative business models. The fourth section describes two key roles in an ecosystem: keystone and niche player. Finally, the last section provides the conclusions of this article.
The rules for business and commercialization success are changing significantly as we transition from an industrial-era to a knowledge-era economy. This transition has both negative and positive consequences. Old rules don't work and change is thrust upon companies. The good news is that there are new tools to help address the challenges of the knowledge-era economy.
The rapid rate of change in technology, markets, end-user expectations, and business models requires companies to innovate faster than ever before. Technology innovation alone is no longer a sufficient factor to achieve success or growth. Successful commercialization requires innovation in business models. This innovation needs to satisfy customer needs in new ways, and defend against low cost disrupters. [Editor's note: Wikipedia's entry for disruptive technology provides a good introduction and further references].
Traditional industrial-era business models held that competitive advantage was based on product excellence, in-house technology innovation, and careful management of scarce resources and supply chains. This perspective served the industry well when resources were costly and scarce and the unit of value did not extend to information and into the virtual, digital domain. Plentiful networking capability, software systems that have little supply chain to manage, and global communities of open source players innovating around customer problems in real time have rendered these traditional business models ineffective at driving business results.
In the knowledge-era economy, companies can only be effective if they implement new business models that address evolving customer values.
In Reinventing Your Business Model, Johnson, Christensen, and Kagermann assert that a business model needs to be changed to:
- address shifts in the basis for competition
- fill job gaps
- disruptively exploit new markets or technologies
- serve an underserved or not served constituency
- defend against low cost disrupters
Shift in What is Valued Drives New Business Models
At the core of the transition from an industrial- to a knowledge-era economy is the change in what is valued by the customer. Two key factors affect the success of a company:
- whether or not the company implements a business model that recognizes the change in what is valued
- how well the company can use ecosystems to harness innovation and scale to global levels
The changes in user behaviour and the associated value propositions are significant and result in power shifts between industries. Consider three cases. First, the ability to record video causes value to migrate away from storage to entertainment. This shift increases distributors' power and decreases broadcasters' power. Second, broadband Internet shifts books to the web. For example, Wikipedia replaces the encyclopedia and real time RSS feeds replace magazines. This shift increases content creators' power and decreases publishers' power. Third, MP3s and digital media rentals replace CDs and DVDs. This shift increases the power of Internet hosting providers and decreases the power of the distributors of physical media.
New entrants have been quick to introduce new business models that leverage existing infrastructure in novel ways. For example, in the Information and Communication Technology (ICT) world, broadband transport and associated quality of service is assumed. The new business value is associated with delivering a differentiated end-user experience. It is fueled by devices such as the iPhone and Blackberry Storm that deliver new end-user values such as an integrated user services portal for the purpose of enhancing the user experience.
Shifts in user value are pervasive. In the social networking world, Facebook has evolved from a simple collaboration tool to a hub of information for a growing number of people. It has displaced instant messaging for the current generation of technology savvy netizens. The pervasiveness of the Internet and ease of access to both people and data have created information overload. Social networks are excellent and effective ways to transform enormous amounts of data into useful information. When social networkers wish to make purchase decisions, they consult their social networks. Social networkers can determine which products best fit their applications and which ones their friends are using. These forms of endorsement are extremely powerful and enable vast amounts of data to be processed in very short timeframes. Another example is when business or government professionals leverage mobile access and email. During a meeting, they can instantly consult their social network to get information, get advice or confirm facts. This capability accelerates the pace of business. Governments have used this approach to provide support to leaders during Question Period in Canada. The ability to harness information and people across the global Internet shifts the basis of competition away from local individuals and companies to global networks.
An environmental shift has been occurring with the growth of virtual worlds such as Second Life, and gaming environments such as the World of Warcraft. As more people visit these virtual worlds, they become the social meeting place of choice for the current generation, displacing shopping malls, street corners and basketball courts. Many companies have recognized and adapted to this shift by setting up shops in virtual worlds. Companies can offer movies, shopping, creative pursuits, and even advanced education. There are bridges between the real and virtual world, such as voice conferencing between avatar owners, virtual shopping assistance that results in products shipped to your real world address, and exporting of virtual assets such as a document that you created or award that you have won in the virtual world into the real world. Hotels are being built in the virtual world which rapidly and cost effectively collect feedback on services, amenities and designs before being built in the real world. Even within the virtual world, there are real estate agents for virtual property, decorators, and casino operators, all living in this new environment. These virtual world transactions generate real money for people as evidenced by the interest of federal taxation agencies. This virtual world displaces more passive activities like television and movies by bringing interactivity, travel and new entertainment values to the forefront.
In the knowledge-era economy, new business models are emerging and competition between business models is becoming a much more significant factor in business success. Companies need to both recognize the nature of competition and choose how they will participate in the market.
Business Models Compete
The richness of solution alternatives for any particular user need creates opportunities for smaller players to challenge large incumbents successfully. Take for example company owners who need a specific application or business process such as a customer relationship management (CRM) system. They have a number of alternative suppliers of solutions. They can approach a:
- supplier of a CRM packaged software and purchase the application and run it within their own operations. This is the traditional product-centric approach where differentiation is based on features, support services, and customization of solutions.
- supplier of hosted solutions for free or subscription based solutions at very attractive cost structures. In some cases, the hosted solution supplier will monetize via advertising, effectively commoditizing the packaged software vendor's offering.
- full service system integrator and acquire CRM as a component of a larger and more sophisticated solution. This one-stop shop approach has appeal for users who are concerned about their existing high value embedded systems and approach this need as merely an incremental value. It is very difficult for a new player to enter into this domain, especially alone, due to the power of the incumbents' installed base.
- device supplier such as Apple or RIM. The device supplier shifts the value proposition to instantaneous mobile and dynamic access by offering the software essentially for free in exchange for profitable device revenue. Since device life cycles are relatively short, device suppliers can bring an ongoing flow of innovation to the user.
- supplier of software infrastructure such as IBM, Oracle, or open source communities to provide the technology and tools to build a customized solution. In this case, one pays for the tools and/or tool support and the application is customized by the user.
The cases described above illustrate current innovations. New business models will emerge over time, providing companies with more choices on how they wish to compete in the marketplace.
In the knowledge-era economy, it is increasingly difficult for a vendor to raise barriers to entry and protect a customer base. For example, when a competitor provides an application for free in exchange for advertising revenue, it undermines the traditional vendor's value proposition of selling the application.
In the knowledge-era economy, the value proposition of an offer does not guarantee success. To compete effectively, a company's business model must be better than similar and different business models used by other players.
In the knowledge-era economy, smaller players can concurrently collaborate and co-create value to compete effectively against larger players. Smaller players can readily attack larger players using disruptive business models.
Since it is no longer viable to pursue business as usual, we examine which new mechanisms exist to compete in the new knowledge-era economy.
Why a Business Ecosystem?
A business ecosystem provides many advantages. It can provide a small company with the proprietary advantage it needs to compete against other larger companies. An ecosystem provides the mechanism to lever pockets of excellence in research, technology, business and marketing in various local regions and industry sectors into a globally competitive force.
Modeled on a natural ecosystem, a business ecosystem addresses two distinct market dimensions. First, in stable business environments, ecosystems provide resistance to invasion. Large companies such as Microsoft resist changes to their business models and drive communities to serve them. In other words, they treat the ecosystem as just part of their supply chain. Second, in dynamic and unstable environments, ecosystems provide resilience against external change. The rapid innovation that players in an ecosystem can achieve contributes to the adaptation required to survive change. These dimensions protect some large players (collaborators) who are increasingly vulnerable in the dynamic world while allowing new players to leverage an effective ecosystem to attack other large players (dominant incumbents).
Business ecosystems nurture new business models. Although the term business ecosystem was coined some time ago, its dynamics are not well understood.
Two roles are key in a business ecosystem: keystone and niche player. The keystone's role is to provide a focal point for the overall ecosystem and enable it to adapt to external changes. A keystone is responsible for the:
- overall output and productivity of the ecosystem
- monitoring of overall health and taking action to ensure that the system is functioning efficiently
- resilience and stability of the ecosystem by stimulating members to remain healthy and to assume the role of missing members
- innovation and creation of new members required to provide ongoing value and growth to the ecosystem membership
A keystone fulfills its responsibilities by providing a dominant design or reference architecture/implementation that facilitates collaboration and harnesses collective innovation. In an open source community, a keystone like the Eclipse Foundation anchors the hundreds of players that are collaborating to create new value propositions. The Eclipse Foundation was able to consolidate the industry around their value proposition and compete effectively against the dominant player. If the market stabilizes, there is an opportunity for one of the members of the ecosystem to grow to become a dominant player.
A niche player is the second key role in an ecosystem. Niche players need not be small or narrow in size and scope. They tend to be focused players, contributing rapid innovation in their area of specialty to the overall ecosystem and its collective value proposition. By collaborating amongst themselves, mimicking the symbiotic relationship between many species in a natural ecosystem, niche players present a healthy and strong contribution to a larger value proposition. For example, one niche player may be a specialist in research and design whereas another specializes in export and distribution. Collaboration provides both companies with economic advantages. To facilitate collaboration, the keystone provides common technology, processes, skills, relationship management, and intellectual property management.
Commercialization is the goal of any business venture and ecosystems can help smaller or specialized companies succeed by filling gaps in their domestic capability and facilitating collaboration.
The following example attempts to illustrate the power of a business ecosystem. Consider a concrete business opportunity that requires a diverse set of capabilities to be pulled together to meet customer needs that are beyond the capability of any single small company. The ecosystem members' response would be as follows:
- one of the niche players would assume the ownership of the overall value proposition, and identify which components are required to be assembled
- the keystone would be leveraged to identify and assemble members that could fill the gaps in the value proposition and identify areas where innovation is required to drive ongoing differentiation
- niche players would collaborate around the keystone's dominant design to rapidly prototype, validate, and implement the required value proposition and then deliver this to the buyer
In this example, niche players are able to commit an ongoing supply of rapid innovation beyond anything a single larger player can commit. They may even be able to bring a greater breadth of capability to the customer by way of an ever evolving and growing ecosystem. The strength of the ecosystem increases as the diversity and size of the membership grows.
The response described above will be disruptive to large incumbents and generally beneficial to ecosystem members and all customers. By changing the business models, smaller players are better able to compete. The open source community and some companies have shown how ecosystems can be used to harness people and innovation worldwide. Companies that leverage control-based business models may perceive the open and collaborative nature of ecosystems as a weakness, similar to early reactions questioning the viability of open source communities. Participation in an ecosystem does require a change of behaviour, much like moving from a solo to team sport.
The new knowledge economy has created many opportunities for new offers and new business models. The industrial-era business models are being disadvantaged by new disruptive models that are enabling new players to effectively compete in markets from which they were previously excluded.
Business ecosystems provide superior value propositions by embracing a market pull model instead of the traditional market push model. The push model requires a single company to promote and sell what it has, absorbing all of the costs on its own. Ecosystems enable a company to better address a customer need, as it can bring a diverse set of capabilities and innovation to the solution very quickly.
Ecosystems have tremendous potential to help companies, especially in the current recessionary times, where partnerships and collaboration are critical to survival and growth. A concerned group of Canadian companies is considering establishing a strong ecosystem focused on the ICT sector, a Canadian sector strength. They are proposing to create an ecosystem derived business advantage by: i) facilitating partnering through pre-packaged legal considerations and intellectual property rights ownership; and ii) lowering investment barriers to markets with pre-packaged technology building blocks. The goal is to provide both cost and revenue benefits to members, helping Canada compete more effectively on the global stage. Member interest has focused around: i) sharing business and market development costs and efforts; ii) gaining favourable access to sophisticated technology capability; and iii) leveraging larger players to gain access to deal flow and to participate in fulfillment beyond their own capabilities.
Ecosystems provide agile and effective collaboration to support commercialization. Technology transfer and network clustering mechanisms focus on specific opportunities and are better suited to stable environments. Ecosystems more effectively fill gaps and address changes so that better outcomes can be achieved.
Connect & Develop: Inside Procter & Gambles New Model for Innovation