Are you an iPhone user? If you are, then it is very probable that you also own an iPad, a MacBook, and Airpods.
Do you frequently order from Amazon? If so, it is reasonable to assume that you own an Alexa homekit and a Kindle e-reader too!
Apple’s and Amazon’s product lines are showcase examples of how to build a business ecosystem.
What does the buzzword ‘business ecosystem’ really stand for? In short, it means that companies are expanding beyond their traditional core products in order to increase opportunities for cross-selling and to boost customer ownership. For instance, a bank might launch a property search platform where it advertises its mortgages, such as the property search site hosted by the Commonwealth Bank of Australia. Alternatively, an accounting software company might offer additional services that cover legal incorporation, logo design, CRM, inventory management, and invoicing. By creating an ecosystem, a business can funnel start-ups and small businesses to its core service, and create a one-stop-shop experience.
When it comes to ecosystem building, the stakes are getting extremely high. Ecosystems bolster consumer loyalty to an unprecedented degree, which makes it much harder for competitors to induce customers to switch products. If you are an iPhone user, can you imagine moving to a mobile phone than runs on an Android operating system? Not likely. Such a change would pose a myriad of inconveniences. Getting used to the new operating system would take weeks. Your old charger and headphones would be incompatible with your new device. You would be unable to connect your new phone to your other devices via iCloud, or AirDrop your pictures to family members. Once you own an iPhone, it is very practical to buy all of your other devices from Apple, and have your family do the same. This is one of the reasons why Apple can sell its products with a price premium. Even if an alternative product from Samsung is slightly cheaper, quitting the Apple ecosystem is too costly and too much of a hassle.
Realising the transformative importance of ecosystems for building a strong and durable competitive position in the marketplace, companies are flocking to build their own before it is too late to join the trend. For instance, Elon Musk is aiming to transform Twitter into the X superapp, which will presumably emulate the example of WeChat in China by offering everything from digital payments, financial services, shopping, ride hailing, and other travel services. Similarly, Facebook has made courageous, yet as it turns out largely mistaken, strides at ecosystem building by introducing the Libra digital currency, and later the Metaverse.
The continuing growth in importance of information technology has paved the way for the rise of business ecosystems, where connection and collaboration make products more valuable as more people use them (see network externalities). Entrepreneur and venture capitalist Marc Andreessen famously noted that “software is eating the world”. This phrase perfectly encapsulates the seismic shift brought about by digital products that are shattering traditional barriers between industries and enabling organizations to forge interconnected networks of value creation.
In this evolving digital landscape, businesses that are involved in the collection and processing of large amounts of data will be in the best position to become the dominant ecosystem players of the future: tech giants, banks, retail chains, and telecommunication firms. They will have the ability to integrate mobility, health, financial services, travel, B2B services, and many more verticals into joint offerings via a mix of partnerships, acquisitions, and independent product launches.
Consultants are understandably eager to stay at the forefront of these ecosystem developments. The most seminal literature on ecosystems is McKinsey’s ‘The Ecosystem Economy‘, a book which also inspired this article. The ecosystem practices of major consulting firms have been growing rapidly in the past years, boosted by the push for digitisation during the pandemic, and without doubt will continue to grow in importance in the future.
Bence Borbély is a Hungarian first-year History and Politics student at the University of Cambridge whose professional fields of interest are management consultancy, public policy-making, politics and international relations.
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