How ecosystem 2.0 helps companies compete with tech giants

A gold rush for digital transformation is sweeping the corporate world. The rapid mainstream uptake of online services accelerated by the Covid-19 pandemic has pushed the launch and upgrade of existing digital provisions up the priority ladder of many companies.

Sensing that companies did not want a repeat of their first forays into creating digital ecosystems, McKinsey studied 100 companies to see how they might better replicate the success of the world’s most valuable companies – almost all of which are specialists in digital ecosystems.

The consultant labels traditional companies’ previous efforts as Ecosystem 1.0, and the coming wave of development twinning superior technology with better understanding as Ecosystem 2.0.

McKinsey argues that the ubiquity of digitisation and the improvement in analytical tools means the playing field between tech giants who started as technology companies and traditional companies challenging for digital land has been levelled to some extent.

An ecosystem is defined as a digital platform that intersects the consolidation of customers with strengthening or dominating customer journey touch points, even if some of the ecosystem is delivered via partnerships. An example is the UK’s Zoopla Property Group, which spans search and comparison engines for property, mortgages, household moving, utilities and home improvement. Other sectors including mobility, travel and hospitality, health and housing are also developing potential as ecosystems.

The magnetism of the one-stop shop combined with cost efficiencies is relentlessly attractive to customers; McKinsey estimates these networks could deliver a $60tn boost to the economy by 2025.

And the wind in the sails of this evolving economy is a panoply of tools and services, advanced database management and the emergence of hyper reliable communications such as 5G. Industry regulators are also helping. More than than, there is a collective will: 60 percent of banks surveyed by McKinsey said they were likely to form or join an ecosystem.

What went wrong with Ecosystem 1.0?

The research showed that, of 100 traditional companies which had launched digital ecosystem strategies, few saw significant financial returns.

Mistake #1: underinvestment in the digital ecosystem

Companies underinvested. While no one expects traditional players to bet the farm on a digital ecosystem, companies were too cautious about protecting their existing revenue streams to think big. This was driven by a lack of deep strategic thinking about customer journeys.

Mistake #2: underthinking migration to the digital ecosystem

Chasing existing revenue streams via a different format is a recipe for stalling. McKinsey gives the example of a bank that jazzed up its online lending app and relied on a marketing push to migrate customers. Few bothered, because the drive was not supported by lower borrowing costs or ease of use.

Mistake #3: lack of understanding on partnership barriers in the digital ecosystem

On the project board, partnerships can look exciting, progressive and frequently come with the additional kudos of a ‘sexier’ brand. But failure to nail down the ownership of value points in the digital ecosystem causes friction or rejection. Both partners must have a clear and sustainable vision for input and collection of revenue in the long term.

Mistake #4: failure to implement the right organisational model for a digital ecosystem

Failure to communicate the importance and benefits of a digital ecosystem project clearly lead to resistance from internal business units and failure to adapt incentives and databases that are fit for purpose. Strong change leadership is needed to implement careful design and governance planning.

How to succeed with Ecosystem 2.0

Given the scale of investment and potential losses from previous digitisation efforts, it’s important to get things right the next time around. Begin by mapping the digital ecosystem plans to the existing business model to see where the overlap is, and where the friction is. The overlap highlights ‘control points’ where companies can maximise impact on the value chain. You can use these to identify where you might focus your ecosystem, or (if there is no overlap) to identify partnership opportunities.

Having identified the focal point of your digital ecosystem you must create value by investing in building or reworking, or attracting partners. Advanced digital skills (AI, digital marketing, high-level supply chain, logistics, innovation) are frequently missing from traditional companies. On the plus side, these are skills that are increasingly easy to find quality partners in.

Finally, you must design at scale. Aim to win market gains and create value for all participants. Investors will demand it. But be cautious of extremes of vision. A serious play for success in Ecosystem 2.0 will demand reworking the organisational model. At one extreme, a company will silo the digital ecosystem in a single department rather than aiming for more holistic change. At the other, companies invest in companies they think are necessary for the transformation, then struggle to integrate the acquisition. The right model is somewhere in between, cut to the needs of both the company and the external market.

With boards and investors looking closely at digital ecosystem opportunities, it’s never been more important to gauge the market, communicate the benefit and – perhaps most importantly – learn from past mistakes.