What is a digital ecosystem? — Understanding the most profitable business model
Please note: This article was originally published on MoreThanDigital — Link to article.
One of the most promising (and already proven) digital business models of the 21st century now is the platforms and digital ecosystems. This is why it’s important to understand what digital ecosystems are and what roles you can have in these ecosystems.
Further interesting read about the roles of Platforms and the “Attention Economy”: Platforms and Content — The business model of the 21st century
The variety of digital ecosystems is already broad and most of the well-known ecosystems span multiple industries and involve different sectors of industry, partners, competitors, customers, and businesses. This defies also traditional mindsets in the industry. The “control and centralize” approach is breaking apart and a mindset of “connecting and combining” comes forward. That is why it is also one of the most successful disruptive business models.
So, one of the most important parts is to understand that these digital ecosystems are not able to survive with just one single participant. There are different roles involved to make it work. Sometimes even giving the competitor a better position can pay off.
What is a digital ecosystem?
A digital ecosystem is a network of interconnected digital technologies, platforms, and services that interact with each other to create value for businesses and consumers. It is composed of various elements such as software, hardware, data, and people, which work together to facilitate digital transactions, communication, and collaboration along various customer journeys. These customer journeys may be interconnected, and the ecosystem can support various activities including e-commerce, social networking, software solutions, hardware offerings and digital entertainment. In a business context, a digital ecosystem can also refer to the set of digital platforms and technologies that a company uses to engage with its customers, partners, and other stakeholders.
A digital ecosystem is focusing on bringing extra value to customers by optimizing data and workflows from different internal departments, tools, systems, as well as customers, suppliers, and external partners. It should remove obstacles from the customer journey and enable every participant in the ecosystem to use state of the art technologies and systems to fulfill their individual needs.
For these ecosystems offer customers a unified and easy to use system that delivers value through a variety of services, products, and insights. This also allows the platforms to grow exponentially and outpace the normal market by using several mechanics involved.
This also means that a variety of business models are possible when scaling an ecosystem. From direct sales of products and services to advertisements, subscriptions, and many more. By understanding the customer better and realigning the product offering it is possible to grow the number of services and products offered with the numbers of insights gathered from the customers. This makes the digital ecosystems so powerful and also so profitable that the list of the most valuable companies in the world is led by companies harvesting the power of digital ecosystems. There you find Apple, Google, Facebook, Microsoft, and many more who are using their customer base and an ecosystem approach to grow revenues and offer better products and services to their customers.
A great Example for this is also Amazon which I explain now in more detail.
Digital Ecosystem Example: Amazon
Since around the year, 2000 Amazon is constantly building on its digital ecosystem. First, the retail giant needed to build a giant server infrastructure around the globe to be able to serve the customers of their e-commerce platform. But soon Amazon began to rent out server capacity to other businesses. This step leads to Amazon Web Services (AWS) and was an important milestone for the company to create this massive ecosystem they have right now.
Amazon used its own AWS infrastructure not only to supply other companies with infrastructure services but also used it as a launchpad for all other services like Amazon Prime Videos, Prime Music, Studio, etc. This led to a fast build-up of services around the Amazon universe and also a kind of lock-in for many users. They had the advantages of being a prime customer and receive packages faster, had access to Amazon Music, and even were able to watch series and movies from the prime library.
Amazon later then involved a lot of outside companies to participate in this ecosystem. So were the e-commerce part the first one to open up and allow even competitors to use this infrastructure of services and tools Amazon offered. This made them a huge success when looking at their whole Amazon ecosystem. The following overview I created gives you a quick glimpse into the vast ecosystem Amazon built. There are more than 40 subsidiaries of Amazon today and there will be more in the future.
5 Key Characteristics of a digital ecosystem
Customer-Centric
When looking at the most successful digital ecosystems (I mentioned Amazon earlier) you see the strict focus on creating value. Sometimes these ecosystems didn’t even have a monetization model at the beginning as they focused on the customer and understanding the customer like we will learn in the next chapter about data before they even start to put a price tag on services or offerings. Being customer-centric doesn’t only look at customer service or the personalized advertisements/marketing the company offers, it’s more of a whole spectrum customer centricity which is only possible due to the scale of the business. This means holistic operations and cross-department and cross-product/service collaboration to integrate the customer journey as well as possible.
Data-Driven
One of the main advantages of using a digital ecosystem is the possibility to gather further information about processes, customers, transactions, and more. This makes data one of the key drivers for every digital ecosystem. The more you can know about the customer the better you can offer services, software, technology, and tools to improve the customer journey throughout.
Automated
Due to the enormous insights, digital ecosystems gather from customers, suppliers, and third parties, it is also possible to make this insight actionable. Automation is one of the key elements in lowering the price, improving customer satisfaction but also offering new services/products to increase the value stream.
Global
You might have already guessed that it’s necessary to have a global footprint. Digital ecosystems are there to scale and by limiting them mostly to countries or regions you will never get the benefit of using a platform and an ecosystem. This means that digital ecosystems also need to be built to make collaboration possible across countries, geographies, and even languages. Sometimes even cultural barriers need to be addressed.
Dynamic
Due to the scale of digital ecosystems, it’s also worth mentioning that the mindset must be very dynamic. Ecosystems need to adapt fast and react to changing market dynamics fast, otherwise, the user base will move onwards and switch the platform. Business intelligence, fast decision-making, and also the use of new technologies and business models need to be at the heart of every decision.
3 Roles in a digital ecosystem
Before you begin imagining yourself as an ecosystem builder you need to deep-dive into your company and your offerings. This also means that you need to map out which ecosystems are important for you and what role you will have in which ecosystem.
There are in general 3 different roles your company can have in an ecosystem.
Ecosystem Orchestrator
These companies take the risk, complexity, and also the challenges of building a digital ecosystem. These are companies like Amazon, Alibaba, Ping, etc. who enable others to participate in an ecosystem and sell goods and services through this system.
Modular Producer
These are companies that contribute to the ecosystem and monetize value in different ecosystems. One of the best-known modular producers might be PayPal. With their service, they offer different platforms and ecosystems the service to have a unified payment gateway, so customers can pay easily. A modular producer can add core services to ecosystems that meet consumers, business needs but also buyers and sellers in a way.
Customer
The customer can be a person or an enterprise, and it extracts value from the ecosystem. When you book an Airbnb then you are a customer of the ecosystem that Airbnb has created and orchestrated.
The boundaries are sometimes fluid. So, for example, someone who is a user of Facebook is a creator (content) and consumer (advertisements) at the same time. Also, companies can find themselves sometimes using, sometimes orchestrating, or sometimes adding services to multiple digital ecosystems.
3 Types of Digital Ecosystems
Functional Digital Ecosystem
This is one of the simplest ecosystems and gets usually built around an existing product or offering of a company. It has a limited number of companies and partners involved (maybe 10–100) and is very focused on the internal aspect. Due to its simplicity and easy integration, it is also the most widely used ecosystem we can find across the globe. But limitations also apply as the data collection and further integration is complicated as this is most of the time a closed ecosystem.
Examples of these functional ecosystems can be found in the automotive industry where the platforms get connected to the digital services of the partners involved to create a very product-centric ecosystem of a smart and connected car, mostly limited to a limited number of products.
Platform Ecosystem
More advanced ecosystems are the digital platform ecosystems. They can involve millions of partners and also can incorporate a multitude of digital offerings. This digital ecosystem is very much based on the “data first” approach to leverage the customer insights to further upsell or design new offerings due to the data generated. But the biggest differentiator is the common platform under which all the partners participate and create their value with/from. So, the ecosystem orchestrator is offering a common platform under which all the connected parties work together.
Google Home is a good example of this. Google is the provides a common platform under which developers, producers and engineers can work together to create home appliances which use the Google Home platform to become connected and smart. Google itself is developing tools like their home speaker but also partners can use the platform ecosystem to offer their products and services.
Super Platform Ecosystem
One of the most complex and complicated ecosystem models involves the integration of different platforms and the use of different user journeys including their data. Super Platform Ecosystems involve usually many different industries, different services and are trying to connect the whole user journey to the ecosystem as good as possible. Most Super Platform Ecosystems are now found in the hands of tech giants like Apple, Google, Amazon, Tencent and some others.
WeChat, the Chinese Super-App, is a perfect example of creating a Super Platform Ecosystem. The app now covers all important aspects of the user’s life. In a single platform it offers thousands of services and features including everyday banking, social media, shopping, communication and more. With every added offering, WeChat can integrate more into daily life thus enabling better data collection which can lead to new offerings and a “lock-in”.
Verdict
While it’s quite easy to explain why these digital ecosystems perform so well and why data, customer-centric, etc. lead to greater wealth generation, we should never forget how difficult it is to set up such ecosystems. A broad customer base, consistent value creation, clear alignment of a diverse range of partners, customers, and technologies as well as a very agile mindset is needed to be able to create such an ecosystem.
It is of utmost importance that companies and individuals understand the power and implications of the rising digital ecosystems around the globe and also find ways to participate, create or interact with these in their own terms to harness the power they have and potentially build the next big thing.
