Building the Right Ecosystem for Innovation
Nathan Furr and Andrew Shipilov
May 2018
As companies grapple with uncertainty and change, they must collaborate in new ways
with unlikely partners
When markets become disrupted by new technologies and competitors, many legacy
companies struggle to keep up. They are often simply ill-prepared to develop new
products and services in the midst of the uncertainty. Rather than attempting to go it
alone in such circumstances, some companies reach out to partners with an eye
toward building a broader ecosystem that will boost their competitive strength. But
what types of ecosystems will work best in a dynamic environment?
Perhaps the most common forms of ecosystems are centralized, where the company
functions as the “hub.” These tend to work well in stable environments where the key
issues have already been worked out. In Amazon.com Inc.’s ecosystem for ebooks,
for example, the online retailer works with the maker of its Kindle tablets and an array
of book publishers but keeps the respective partners separate from one another.
However, in many settings today, the requirements are fluid and the objectives less
defined. What’s needed, therefore, isn’t a broker or intermediary to link the various
partners but an orchestrator who can find connections among different partners and
encourage them to work directly with one another to identify new or nascent
opportunities. Rather than building a centralized ecosystem, the orchestrator’s job is
to create what we call an adaptive ecosystem, where partners develop significant
projects or innovations together.1 For companies, this requires both imagination and
flexibility.
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Driving Innovation
In our most recent research on how organizations generate value from their corporate
alliances and partnerships, we’ve studied how certain companies, including Samsung,
Mastercard, Lowe’s, and Cisco Systems, have used adaptive ecosystems to define
new offerings (see “About the Research”). Unlike traditional, centralized ecosystems,
which tend to rely on partners that have fairly obvious tie-ins to the existing business
model (as Amazon had with the Kindle maker and book publishers), companies using
adaptive ecosystems frequently work with partners with less conventional
capabilities.2 For this reason, we refer to them as “uncommon partners.” (See
“Centralized vs. Adaptive Ecosystem Strategies.”)
About the Research
Over the past 15 years, we have studied how companies create value from alliances,
ecosystems, and innovation. We have looked at what factors drive innovation and
performance in a variety of industries — including investment banking, high fashion,
renewable energy, information technology, automobile manufacturing, and many others.
Centralized versus Adaptive Ecosystem Strategies
CENTRALIZED ECOSYSTEM ADAPTIVE ECOSYSTEM
Structure A “broker” company connects to An “orchestrator” company connects
partners but keeps them multiple partners and encourages
separate, forcing them to work them to work directly with one another.
through itself.
Partners The partners are familiar The company seeks out unfamiliar
complements to the company’s partners with different business
existing business model. models.
Why it’s used Partners are coordinated by the Partners are encouraged to combine
broker company to capture value their diverse resources to create value
(primarily for the broker). (for all companies) quickly, flexibly,
and at low cost.
When to use it When industry boundaries are When industry boundaries are shifting.
stable.
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CENTRALIZED ECOSYSTEM ADAPTIVE ECOSYSTEM
Strategic focus Start with a specific problem Start with a “battlefield” — an area you
(such as how to sell ebooks want to explore (such as how to use
online). blockchain or AI technologies in your
business).
Relationships Maintain arm’s-length Forge cooperative and supportive
relationships and attract partners relationships and attract new partners
via traditional outreach methods. with “bat signals.”
Impact on the The broker changes in a limited The orchestrator transforms from the
focal company way because its business model “inside out” as it learns from partners
is stable. and changes its business model.
Samsung Electronics Co. Ltd.’s recent experience developing a personal-
health monitoring business offers a good example. In the past, the company’s
innovation efforts were geared toward being a fast follower as opposed to a market
leader. To support its goals, Samsung coordinated innovation activities centrally
through its strategy and innovation center. But as the company evaluated
opportunities in personal-health monitoring, it reached out to more than 20 startups
and academic researchers working in fields related to blood pressure, hydration, and
nutrition. In addition, it developed a close working relationship with Nestlé S.A., the
Swiss food conglomerate. Although Nestlé had no experience in consumer
electronics, it had done significant research on the impact of nutrition on the human
body.
Assembling a network of other outside partners, Samsung then set out to
develop a platform (which it calls “The Voice of the Body”) where users and their
doctors can monitor health and medical issues using the latest technology. In
contrast to how things work in a centralized hub ecosystem (where each partner
coordinates separately with the company), the partners work as a team to create new
tools for improving medical care. Eventually, Samsung envisions introducing devices
capable of collecting users’ biological data and interpreting it in real time, refining the
results using algorithms based on an elaborate user database. Although Samsung’s
focus is electronics, the opportunities could extend beyond monitoring devices. The
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company also sees possibilities for developing food products that have clinically
proven health benefits.
In adaptive ecosystems, it can be difficult to predict all of the required expertise
and capabilities. As opportunities arise, orchestrators need to be prepared to revisit
the mix of partners. The payment processing industry, which is undergoing
tremendous change, provides a case in point. Over the years, Mastercard
International Inc. has competed against Visa and American Express with a
centralized ecosystem strategy in which it interacts seamlessly with a long list of
banks and merchants that use Mastercard’s infrastructure to process payments from
its customers. More recently, however, Mastercard saw opportunities to broaden its
scope of business. Rather than restrict itself to credit cards, the company wanted to
develop new offerings in the growing realm of digital payments. To do this, it needed
an adaptive ecosystem that could develop new offerings tailored to emerging
consumer needs. In London, for example, it began working with Transport for London
(the authority in charge of the city’s subway, train, and bus transportation), Cubic
Transportation Systems (the transit infrastructure provider), and retailers in the
consumer goods business.
So far, Mastercard’s efforts to move into new areas with new partners have
been encouraging. Since payment solutions can be easily embedded in
smartphones, configuring Mastercard’s payment platform to pay for train and bus use
is a no-brainer. But by working with partners and using both historical data about
commuter behavior and a steady stream of new data, Mastercard is also hoping to
drive improvements in the commuting experience. For example, in an effort to shift
ridership away from the busiest periods of the day, it could offer commuters discounts
at coffee shops and other businesses if they opted not to use transportation systems
during certain times of day. Mastercard executives we interviewed suggested that
relatively small changes in consumer behavior — as little as a few minutes at the
right times — could make a big difference. Indeed, for every 1% shift in peak demand,
large cities such as London, Chicago, or New York City might save millions of dollars
in delayed capital expenditures each year and, more important, create a more
pleasant experience for travelers.
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Implementing an Adaptive Ecosystem Strategy
How does a company implement an adaptive ecosystem strategy? Based on our research,
we have identified a series of essential activities.
Define the ‘Battlefield’
While centralized ecosystem strategies depend on having specific, well-defined
problems and solutions (how to sell ebooks online or how to equip houses with solar
panels, for example), adaptive ecosystem strategies are suited for situations where
the problem and the solution are uncertain or still being sorted out. As a result, you
need to start by defining the “battlefield” — or the area to explore. From there, you
can begin to assemble an ecosystem to explore the challenge and refine it as your
understanding about the opportunity evolves. Mastercard, for example, wanted to
learn how it could use artificial intelligence (AI) in its business. To understand how AI
could be integrated with payment solutions, it reached out to Pizza Hut LLC and
SoftBank Corp., a Japanese telecommunications and internet company that has
investments in a number of technology start-ups.
Working together, the companies developed a new mobile customer interface using
Pepper, Softbank’s humanoid robot, as a diner’s assistant in some Pizza Hut
restaurants. The robot identifies customers from their mobile phones, recommends
the day’s specials, and takes orders. Mastercard’s technology allows customers to
pair their phones with the robot for identification purposes and to process
transactions. The robot, in effect, assumes the role of cashier and lightens the load
for servers. For Mastercard, this move into robotics represents a radical step.
Use ‘Bat Signals’ to Attract Partners
After defining the battlefield, orchestrators need to find and attract the right partners.
In our experience, some of the most successful adaptive ecosystem strategies have
been achieved when companies were able to connect with uncommon partners on
the outer fringes of their industries — or even beyond the traditional boundaries of
their industries. However, identifying the capabilities required for innovation can be
challenging: You don’t know precisely what you will need along the journey, and you
simply don’t know what you don’t know.
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Orchestrators need to be willing to experiment with new ways of doing things.
Consider this example: Lowe’s Companies Inc., a home improvement retail chain
based in North Wilkesboro, North Carolina, wanted to explore opportunities in the
emerging 3-D printing and additive-manufacturing business. So, it reached out to a
range of potential partners already in that market, including a developer of 3-D
designs, a provider of high-volume distributed 3-D printing, an industrial 3-D printing
company, a design agency, and a sensor manufacturer. Kyle Nel, founder of Lowe’s
Innovation Labs, described this part of the process as putting out “bat signals,” in
hopes that the right set of partners would come together. Management recognized
that moving away from the company’s established retail business and into a new
market would be challenging and require a new business model — one flexible
enough to enable customers to design things they could print from stores. The
partners Lowe’s recruited to the new ecosystem brought not only the capabilities
necessary to enable the new business venture, but also key insights about how to
attract customers to the offering. To promote the new capability, Lowe’s designed a
media campaign and released a series of videos, which in turn have attracted some
additional new partners.
Connect Uncommon Partners
While centralized ecosystems are frequently based on arm’s-length transactions that
keep partners separate from one another, adaptive ecosystems are structured to
encourage cross-fertilization. Their effectiveness depends on close and supportive
collaborations between the organizing company and the partners, and
also among the partners. Moreover, adaptive ecosystems perform best when made
up of partners from outside one another’s traditional ecosystems. Having uncommon
partners helps the company at the center explore unfamiliar terrain.
Making this happen can be challenging because most of the partners have never
worked with one another and there are few models for such collaboration. Cisco’s
recent work with companies including DHL, Caterpillar, and Airbus to create a new
digital supply chain provides a useful example. In 2015, Cisco brought more than 80
people together in Berlin for a brainstorming session to think of ways in which
manufacturers could manage global inventory in a more flexible manner and better
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forecast problems with component supplies before they arise. The collaborators
sought ways to enable companies to track shipments more precisely with sensors
and authenticate the sources of components with blockchain technology. The
possible uses of blockchain technology in supply chain management are wide-
ranging. In the near term, companies will be able to use secure, digitized supply
chains to monitor and authenticate specific spare airplane parts, for instance, or the
origins of the diamonds used in jewelry. Such breakthroughs would not have been
possible without an ecosystem of uncommon partners.
Companies with experience in adaptive ecosystems are finding that, by definition,
collaborations don’t follow a set pattern. Thus, Cisco has found advantages in
working with a core group of partners across multiple projects. According to Kate
O’Keeffe, senior director of Cisco’s CHILL initiative, such stability allows people on
both sides to gain critical experience they can apply to other projects.
Leverage Opportunities to Transform from the Inside out
Not all adaptive ecosystem efforts will lead to successful innovations or market
entries. As with any business strategy, there are risks. Still, adaptive ecosystems
provide companies with opportunities to transform the way they do business. Many
executives participating in adaptive ecosystems emphasize the importance of
learning from companies that are accustomed to operating in different markets. For
example, Galeries Lafayette, an upscale French department store chain, created a
startup accelerator whose aim is to disrupt its traditional brick-and-mortar business.
In the accelerator, several startups have begun to work together to create digital
solutions to enhance the retail experience. Philippe Houzé, the company’s executive
chairman, told us that building the ecosystem of startups has been key to helping
Galeries Lafayette transform the “inside from the outside.” Previously, Houzé
explained, senior executives often resisted changes to the business model, but
exposure to the startups has made them more flexible. The transformation occurs
because, by sharing information and ideas with partners from other spheres,
companies can extend their sense of what’s possible — in their markets and in their
organizations. Recently, Mastercard has been using its adaptive ecosystem strategy
to identify new growth opportunities. One area it is exploring is the internet of things,
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which has led to an emerging partnership with Samsung. The two companies, now
both adept at managing adaptive ecosystems, are collaborating to create a smart
refrigerator that can monitor the supply levels of everyday items, place orders, and
arrange for payment and delivery. Depending on the user’s settings, the refrigerator
could analyze families’ purchasing habits and make suggestions for their shopping
lists.
Mastercard is continuing to look for other ways to work with partners in extending its
digital platforms into new markets. Recently, it began working with London-based
Cafédirect Producers Foundation and the Bill and Melinda Gates Foundation on a
pilot program called 2KUZE that will build a platform to enable small farmers in Kenya
and other East African countries to sell their crops to wholesale customers and
receive fair and secure payments. Few of the farmers have bank accounts, but most
have mobile phones, so the platform will allow them to receive payments directly
through their phones. Mastercard says it wants to apply what it learns on this project
to markets in the developed world.
Make Contracts Flexible When you’re building an adaptive ecosystem that will
venture into uncertain technologies, it is impossible to write partnership agreements
that spell out every possible contingency. Thus, many adaptive ecosystems don’t
start with onerous contracts detailing precise deliverables or distribution of value.
Instead, companies use simple framework agreements that emphasize the general
boundaries of cooperation and leave a lot of room for adapting to specific
technological discoveries and new business models as they take shape.
Ecosystems need to align with an industry’s life cycle. Adaptive ecosystems are best
suited to emerging industries where there are significant uncertainties and the
broader environment is not yet well-defined. Centralized ecosystems work for mature
industries and stable contexts. Over time, a company’s ecosystem strategy will
evolve: As industries that were once unsettled begin to mature and the value-creation
patterns become more established, companies may move toward favoring
centralized management over adaptive models. How this pattern plays out will vary
from ecosystem to ecosystem.
More significantly, companies engaging in ecosystem strategies are building
collaboration and network muscles that will serve them well over their entire life
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spans. Indeed, the ability to discover and leverage new forms of value in collaboration
with unexpected partners is likely to extend a company’s life span. Organizations with
the ability to flex with, read, and react to market shifts with an evolving set of
collaborators are well suited to a competitive environment whose twists and turns
have no end in sight.
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