Old game, new rules: how ecosystem businesses like Amazon, Google, Alibaba and Tencent do strategy.
Ecosystem businesses are nothing new: car manufacturers, for example, lie at the heart of vast networks of parts and service suppliers; and the insurance market Lloyds of London has been around since the 17th century. The difference between these traditional businesses and firms like Amazon, Google, Alibaba and Tencent is a matter of intent – the latter are ecosystems by design not evolution.
Writing for Harvard Business Review, Julian Birkinshaw gives us the strategy rules by which today’s ecosystem businesses play.
Traditionally, competitive advantage is “based on access to a scarce resource or ownership of a patent, sometimes… on customer loyalty and a strong brand, and sometimes it is an artifact of government regulation”. You build a castle, then you pull up the drawbridge.
Firms like Amazon have few physical assets and don’t make anything. Value comes from creating relationships and networks. Their aim is to enable markets, not capture them – the more players, the more money to be made. If that’s the kind of business model you’d like to pursue, here’s how to go about it.
1) Focus on customer volume. With one billion users, WeChat is China’s most popular social-media app. It grew its market by delighting consumers with new and exciting innovations. Once established, it prioritised customer experience over the temptation to monetise – even now, users only see two ads each day. The money WeChat makes comes mainly from the commission it charges on transactions.
2) Keep customers coming back. WeWork rents work spaces in city centre locations. Rather than trapping customers into tightly written leases, it emphasises flexibility and adds value to the customer experience by holding networking events and startup clinics, and by offering “lifestyle services”. The result: customers come and go, but they keep coming back.
3) Don’t try to corner the market. Because Amazon creates and supplies some of its own products, there’s always a tension between the company as market maker and competing suppliers which use its platform. Alibaba doesn’t make anything and so offers equal opportunity for all its users. At the start of 2018, it’s third party e-commerce business had grown to more than twice the size of Amazon’s – and with a staff of just 66,000 people, compared to 550,000 at Amazon.
4) Keep moving. As the ecosystem hub, you have unrivalled market data and an unparalleled opportunity to grow your ecosystem even larger by being the first to open new markets. “Google illustrates this point, with its steady stream of new analytics services, as does Alibaba, with its traffic aggregation platform.”
Ecosystem business models are not without their drawbacks – there may be problems with regulators and government intervention and, with few tangible assets, they are inherently vulnerable to their own disruption. Today’s ecosystem businesses reduce risk by hybridisation – Amazon is also a bricks and mortar retailer and distributor, Alibaba is building its AI business, Google also sells tech hardwear.
Ecosystem business models are complex, but the key to building a vibrant platform is to focus on the user. By making their experience ever richer, your customer base will multiply. The more customers you have, the more data, the more data, the more insight, and the more opportunity you’ll have to improve and grow your ecosystem.