Four Principles for Competing within Ecosystems

The most central question for any business today may be the following: “To what extent does delivering value to your end-user involve the collaboration of multiple partners in your ecosystem?”

Research Outthinker will publish later this year shows companies that outperform their peers financially are 12 times more likely to deliver value through ecosystem partnerships. Companies that are better at attracting and retaining top talent are 13 times more likely.

Success tomorrow, and already today, seems to depend on your ability to engage ecosystem partners to serve your customers. Delivering an automobile is not enough. Customers want an end-to-end transportation experience. Dinner is not enough. Diners want a holistic culinary journey.

It was of little surprise then, that when we convened 25 chief strategy officers of large enterprises in New York in May, they wanted to talk about … ecosystems. Luckily, we had just the right expert to engage with them on the topic: Dr. Felix Oberolzer-Gee, Harvard professor of strategy and bestselling author.

Felix’s strategy model is deceptively simple, and it reveals four key principles for winning in the next generation game of ecosystem-based competition.

The value-based strategy framework

First, the model. Felix’s framework states simply that the value of any organization (company or ecosystem) can be explained by the formula Value Created = WTP – WTS, where:

• WTP is the willingness of a customer/end-user to pay
• WTS is the willingness of an employee or supplier to sell

WTP increases when customers value your offer more than the alternatives. WTS decreases when employees or suppliers prefer to work for or supply to you versus other options because, for example, working for you is more inspiring and meaningful or supplying to you is easier.

To build a valuable, differentiated, and sustainable organization, then, you want to continually increase WTP (by making your offering more valuable to customers) and decrease WTS (by making working for or with you more attractive).

Implications for ecosystems

This model is particularly useful not only because it simplifies numerous strategic concepts – economies of scale, resource-based view, key success factors, customer lifetime value, etc. – into one intuitive model, but because it also reveals insights into how to compete in the emerging era of ecosystem-based competition.

As Felix unpacked his model, outlined in his book Better, Simpler Strategy, to our chief strategy officer members, in a sunny, windowed event space overlooking the Hudson River and New York’s skyline, four keys emerged:

1. Customer and provider captivity: Michael Porter famously introduced the term “switching cost.” The principle still applies: The more undesirable or difficult it is for customers and suppliers to switch away from you, the more successful you will be. In the era of ecosystems, however, you must also think about ecosystem partners. What compels them to work with you, and how difficult/undesirable would it be for them to switch to working with other ecosystems?
2. A brand with multiple audiences: In the past, a company needed only to manage a brand to attract customers and, generally considered secondarily, to attract talent (your “employer brand”). In the era of ecosystem-based competition, your brand must also attract complementary partners and value-added distributors. For example, at its founding, Microsoft needed only to appeal to software and microprocessor customers. Today, Microsoft orchestrates a robust ecosystem that influences 95% of its revenue. It is also considered a top place to work by its employees.
3. Co-creation of brand: In a traditional organization, your marketing organization can fully define and control your brand. But in an ecosystem-based environment, your brand may be co-created with your partners. In a collaboration between IKEA and LEGO, the two brands not only came together to sell LEGO blocks in IKEA furniture stores, they created a new line of functional storage solutions called BYGGLEK, which seamlessly stores the blocks and weaves room for play into the design of a home.
4. Co-deliver of the brand promise: In a traditional organization, you enjoy the control to fully deliver the end-to-end value proposition. You can control every nut and bolt, answer every service call, and provide supporting services. But in an ecosystem-based scenario, you must depend on others. Think about the brands of an airline network (e.g., Star Alliance) or corporate constellations (e.g., the “Wintel” brand, a combination of Microsoft Windows and Intel along with the numerous other technology partners who contributed to the brand).

Success stories

Several cutting-edge ecosystem-based companies reveal interesting tactics for taking advantage of these four new strategic principles. The world’s leading appliance company, Haier (which owns GE Appliances and other brands), has adopted radical internal organizational structures to make it easy for employees to launch new companies from within so they can help co-deliver on Haier’s brand promise.

For example, when two employees of GE Appliances saw an opportunity to apply the company’s air conditioning products to RVs (recreational vehicles), they were able to launch a new company, partially owned by GE Appliances, to pursue it. Haier has also shifted its brand messaging away from the functional benefits of its product (cleaner clothes and dishes) toward brand promises that also appeal to ecosystem partners, such as being easy to work with and fairly sharing value.

Building your ecosystem

If your future depends on rallying an ecosystem to deliver for your end-users, you need to define, manage, and deliver a brand value proposition that works for all ecosystem stakeholders. This means answering four critical questions:

1. What would make ecosystem partners prefer working with you over alternative ecosystems?
2. What purpose-driven brand promise will attract customers, suppliers, employees, AND ecosystem partners?
3. What values are most important to you to ensure alignment in a co-created brand?
4. What mechanism will you put in place to ensure your end-user experience is consistent with your brand promise?

Photo: Dr. Felix Oberolzer-Gee speaks at an Outthinker Strategy Network event