By Jeff Wray and Greg Sarafin
To maintain market leadership, CEOs seeking to accelerate innovation in their organizations often find themselves at a crossroads: They must decide whether to build, buy, or partner. In response, more and more CEOs are adopting ecosystem business models—and with good reason.
Ecosystems account for an average of 13.7% of the annual revenue of organizations that use at least one ecosystem business model, according to a recent EY study, as well as driving 12.9% of the reduction in cost and generate 13.3% of incremental revenue. Beyond the numbers, the ecosystem offers organizations clear benefits, such as greater access to technical capabilities, talent and assets.
Despite these benefits, however, ecosystem business models can be contractual, logistical, and commercially complex, with structures that are often unclear to new participants. These challenges increase for CEOs who are uncomfortable being in a partnership arrangement where they cannot sit in the driver’s seat.
The real questions CEOs should be asking themselves are:
- Are we ready for a change in thinking?
- Can we hand over control, trust to our partners within a defined ecosystem business model?
- Are we ready to share the limelight to gain the greater benefits of a shared value?
Many types of ecosystems
Organizations looking to access new growth opportunities using the ecosystem approach, as opposed to building it themselves or buying a company, need to identify the “right” ecosystem with right arrangements and right participants for the business goals they are trying to achieve.
Three in seven business models for ecosystem value creation are the orchestrated markets of large technology companies; setups that allow competitors with different footprints to join forces, such as airline-loyalty alliances; and value-chain integration, such as Insurwave, a blockchain-based shipping insurance ecosystem built together with the EY organization and other collaborators.
Ecosystem benefits
Building, buying, and partnering are not necessarily the same thing. Ecosystems are powerful for organizations testing new waters, as they offer a relatively safe environment for experimentation with limited financial commitments. Organizations can also use ecosystems as a pipeline development strategy in conjunction with mergers and acquisitions.
Ecosystems are about more than revenue growth by accessing new growth opportunities. They allow companies to grow their multiples due to the capital and effective way they can access these opportunities using the expertise of their ecosystem partners. Ecosystems generate incremental revenue of ~12.9% and enable cost reductions of ~12.9%, according to the EY Ecosystem study.
Barriers to an ecosystem mindset
Despite their intent, some organizations struggle to understand how to use ecosystems to drive growth. The struggle comes from a narrow understanding of what an ecosystem looks like, based on prevailing industry norms, when the organization has tried the obvious options and found and implemented the most promising. variants.
However, to stay ahead of the innovation curve, companies need to look at options they haven’t yet explored. Companies need to think bigger and bolder by looking at all seven ecosystem models, not just the ones they are most familiar with. Each organization should investigate who is the best fit, based on the desired business outcome.
Additionally, organizations must shift their focus to concentrate on the logic and management of the ecosystem they are orchestrating or participating in, rather than just thinking about finding the right partner.
In sports, a winning team is not necessarily a set of the best players, but those who work together well with a set game plan to achieve a common goal. Most teams need a captain—an orchestra. The rest of the group have important roles, but they follow the general standards defined by the orchestra.
This approach—where an orchestra sets common standards, but niche roles are implemented by other groups—can be understood when companies with niche capabilities access new areas. of growth, or where they and their competitors both seek to orchestrate. ecosystem but clients are keen to avoid over-reliance on one supplier.
In this scenario, CEOs should ask themselves, “If I can’t drive it, am I willing to take a back seat to access the growth I see in this new opportunity?”
Implications and next steps
To take advantage of the ecosystem’s opportunities, CEOs and C-suite leaders should consider the following steps:
- Look at the alliances and partnerships that you and your competitors are part of. Identify any patterns and ask if your organization is sticking to the mold most prevalent in your industry—or if you’re exploring the art of what’s possible in ecosystem strategy.
- Ask yourself, “Am I just taking small, comfortable steps closer to my core business, or am I ready to take a leap of faith for broader growth opportunities?” When thinking about a growth strategy, broaden your horizons. Rethink how you consider your strategy and whether to pivot.
- Revisit the growth priorities you may have neglected. Are they sidelined because they cannot be unlocked in your current value chain structure? Will that change in a suitable ecosystem?
- Learn to let go! Embrace the opportunity to enter attractive new growth vectors where your organization may not be best placed to lead the charge itself but can make a significant contribution to a greater value proposition.
Learn more about how EY teams can help your organization master its ecosystem strategy.
Jeff Wray is the Global EY-Parthenon Leader.
Greg Sarafin is the EY Global Alliance and Ecosystem Leader.
Additional contributors:
Andrew Hearn, EY Global Development Leader, Strategy and Transactions; Prachi Gupta
