Building and leveraging your ecosystem to spark innovation-based growth

What matters most in creating and sustaining innovation is building and strengthening interdependent links amongst ecosystem players, or building an ecosystem. Readers of this article will learn not only how to build an ecosystem, but also how to manage one so that all the partners in the ecosystem profit from the innovation.

What determines innovation success? In recent years, we learned that it is not necessarily the underlying technology or the innovation’s value proposition. More and more, we came to realize that the innovation ecosystem, the interdependent partner network needed to generate, develop and deliver a technology-based or business-model innovation can be the ultimate defining factor. With the source of differentiation shifting from the innovative technology core to the partner network, business leaders must now understand how to build and play their innovation ecosystem.

Examples abound. The iPhone’s success has probably more to do with its ecosystem of content producers and consumers than to its hardware, looks or appealing browsing features. Illustrating the interdependency aspect of ecosystems, application developers also are better off choosing this particular ecosystem as opposed to another one because of the guaranteed customer potential it offers. Also, as an example of how a car-applicable modular technological innovation could become a new market disruption, the electrical car will remain a green niche solution or we will keep on driving hybrid cars until we have a reliable, omnipresent electricity-providing ‘fuel’ station network

Nor is the network phenomenon only visible in technology-intensive industries. Nestlé’s Nespresso’s initial success was achieved thanks to its differentiating, architectural inspired innovation  — bringing professional coffee-machine quality to the home environment. However, its sustained leadership in pioneering this newly discovered market segment of at-home quality coffee consumers has probably more to do with the customer intimacy created by its customer ‘club’ concept, than by the soon-to-expire patents for the coffee-capsule technology. The Nespresso club is an ecosystem that creates the effect of belonging, a source of stickiness tying in customers through constant product renewal, personalized choice and swift Internet-based direct delivery.

Managing the innovation ecosystem

Considering their importance, we need to ask how we ought to manage innovation ecosystems. The open-innovation perspective in management literature taught us that corporate innovation strategy-making should be seen more and more in an interconnected world. However, viewing the corporate network as an ecosystem requires more than connecting the innovation funnel to the outside world, monetizing unused IP in high-tech, or big pharmaceuticals tapping into cash-strapped but idea-rich biotech ventures. Instead, the ecosystem perspective recognizes that what matters most in creating and sustaining innovation is building and strengthening interdependent links amongst ecosystem players. Moreover, ecosystem management is not just about plotting the network of partners and stakeholders relevant to the innovation. It’s about designing and executing a complex systems strategy so that innovation success with key partners sets in motion a chain of success that is transmitted to the other partners in the ecosystem, for the ultimate benefit of the innovation and the ecosystem as a whole.

The platform-based, high-tech industry — think the Internet, software, semiconductors, high-tech systems and the like — was the first to adapt the biological ecosystem. Most if not all of the literature to date on managing ecosystems focuses on this adaptation. However, the reader will agree with me that managing a retail or banking ecosystem should be quite different from managing an Intel semiconductor or Pfizer’s pharmaceutical ecosystem. Both corporations go about managing the idea conversion cycle differently; from idea generation, converting the idea into a product or service-based solution, having the innovation adopted by the markets, which then again becomes a source of new ideas. I think that all industries can benefit from thinking in terms of ecosystems when designing an innovation strategy for corporate growth and renewal. As we will see, banks and pharmaceutical companies have differently shaped ecosystems that support the competitive strategy of ecosystem players in very different ways.

Following the idea conversion cycle, I will distinguish among the three types of ecosystems that a company can typically build around its innovations; science-based, technology-based, and service-based. In the following sections I will discuss how value is created and captured for each type of ecosystem, and how this influences the shape –the types of ecosystem players and the relationships that typically govern their collaborations–they take and some of the business models they typically use to monetize their innovations.

Science-based ecosystems

Science-based ecosystems are geared towards the front-end of the idea-conversion cycle. Value is created and captured by building critical mass when pushing the scientific frontier in an applied field. Semiconductors and the life sciences, the latter encompassing pharmaceuticals, biotech and medical devices provide examples.

Pharma needs critical mass to feed its high-attrition development pipelines, a reality rightly caused by the very stringent pass criteria society has established for new drugs. But pharma is unable to provide the needed critical mass alone, in house, and its ecosystem becomes composed of biotech companies with whom it enters into joint development and licensing deals to capture value. A breakthrough technological trend in this ecosystem was the shift towards better disease understanding after the cracking of the human genome. This made personalized medicine approaches feasible. The breakthrough also broadened the variety of organizations in the ecosystem to include bioinformatics companies enabling ‘in-silico’ or computer-based, drug-model testing, and academia, which unraveled the disease mechanisms that provide the starting point for targeted drug discovery.

In semiconductors, value is created in ‘More Moore’ research projects that beat Moore’s law, that states that computational power will double every 18 months for the time to come. Surfing on the trend towards more mobile and smaller devices, research attention gradually shifts towards reducing the need for battery capacity. Following the emerging Koomey’s law, battery capacity needed for a fixed amount of computational power will fall by half every 1.6 years, making it possible for devices to run on ambient energy like light, vibration or heat. Building the critical mass for solving this problem is reached through partnerships with universities, in arrangements like Intel’s ‘Lablet’ approach, where academics and Intel scientists are put together in a very free- experimentation environment. Another approach to building critical mass is IMEC’s Industrial Affiliation Program (IIAP), in which the huge research costs and risks that transcend the capabilities of individual partners are shared to jointly develop next-generation semiconductor technologies. (IMEC is the Leuven, Belgium-based microelectronics and nanotechnology research organization). This potentially also happens in ‘More than Moore’ domains like Nanotech for Health, where nanotechnology and life sciences ecosystems merge into one new enriched ecosystem.

To achieve the all-important critical mass, science-based ecosystems consist of research partnerships amongst universities, small front-end players like biotech companies or design houses, large pharmaceutical or semiconductor companies that provide the funding and complementary know-how to convert the ideas of the smaller players, scale them up and take them to market. Ecosystem-shaping decisions include collaboration agreements with academia. Intel’s Lablets are a case in point. Set up as experimentation spaces where academic and Intel scientists meet, the space allows the two groups to explore new technological fields. As soon as a marketable idea emerges it is taken out of the Lablet and potentially incubated using corporate venture funds or transferred to one of Intel’s business units. In life sciences, the functional division of idea generation and idea exploitation amongst biotech and pharmaceuticals has given rise to markets for technology, where bio-techs license their immature ideas to pharma by setting up co-development and co-marketing deals. Milestone payments and royalties guide the conversion of the innovative idea into a business.

Overall, the shape of a science-based ecosystem is geared towards accessing potentially disruptive ideas. Defensive use of patents is essential to ensure transparency in an ecosystem that thrives on technology-market transactions that build intellectual property.

Technology-based ecosystems

Technology-based ecosystems focus on idea conversion and innovation adoption. To create value, they should leverage the power of collaboration by connecting with suppliers and companies in complimentary businesses, and stimulate the fast adoption of innovation. Example ecosystems include consumer electronics, high-tech, automobiles, and machinery.

Combining existing technologies often drives innovation in these industries, something which can lead to new market disruptions. Nintendo’s Wii, quickly followed suit by Microsoft Kinect, are good examples. Neither gaming nor remote motion-sensing technology was new to the world at Wii’s conception. However, it was the combination of the two technologies that led to a new market disruption, seducing non-gamers to interact with the gaming platform in a completely new way. The automobile sector, where the combination of electronics and mechanics that delivers cleaner engines and intelligent driver interfaces, provides another example of such market-changing innovation.

Fast ecosystem building is a necessity, mainly to compensate for the poor protection provided by patents in these industries. To build fast, partnerships are crucial. For example, let’s do a thought experiment. Imagine launching a smart refrigerator, one that can sense what products go in and out so it can keep inventory for you and provide you with stock keeping information so it can inform you, based on your past consumption behavior, when to order new goods. Because you’re not going to use a barcode scanner each time you take food in and out your fridge, food packages will need to be equipped with RFID (Radio-Frequency Identification) technology – an electromagnetic technology that sends information from a tag attached to the food package to a sensor integrated into the fridge. Imagine that you have invented this scanning and inventory-solution technology. How do you manage its fast adoption, and through which partnerships? Refrigerator companies would not be the prime target as they would be interested only in promoting this to end consumers if there would be an obvious demand. Also, you’re facing a market with network externalities, while products need to be RFID-tagged, which is not yet the case. And as long as there are no tagged products, your innovation is of no use. So how do you build this emerging ecosystem around your innovative technology that, let’s face it, can be easily copied because it’s a combination of various existing hardware and software components brought together in an innovative solution?

My view is that the only way to do this is to form an alliance with a retailer that has the power, and potentially the interest to leverage the emerging smart refrigerator ecosystem, simply because it is in their interest to do so. Retailers are the only ones in the ecosystem who have the buying power to force food companies to RFID-tag their products, which you need, otherwise you don’t have a solution. Why would they do it? Well, maybe they can be convinced to offer their customers a package consisting of a sensor they can put on their fridge with a connection to an application on their mobile or home computers that can generate a grocery list. This could be part of a customer intimacy strategy they might use to differentiate themselves from competing retailers.

The key lesson in this story is that to build an emerging technology-based ecosystem, one needs to focus on the interdependency between partners, on knowing who is able and willing to leverage its position for the benefit of your technology. Managing fast adoption has more to do with understanding and playing the ecosystem than it has to do with differentiating product features.

To summarize, the shape of a technology-based ecosystem is predominantly oriented towards making connections between suppliers and complementary firms in an integrator or federator business model. Integrators like consumer goods manufacturers connect to suppliers, sometimes tapping into their ideas by using crowdsourcing, potentially creating value from technology combinations. Federators like smartphone manufacturers manage an ecosystem of content providers. Others build an ecosystem of retailers, food packagers and RFID tag and sensor providers to federate a smart refrigerator solution. Intellectual property in the form of patents is used more to facilitate collaboration through cross licensing than for defensive reasons.

Service-based ecosystems

Service-based ecosystems are oriented towards solution adoption. Their key role is to provide for asset optimization. Bank and insurance companies, engineering firms and consultancies, but also retail, utilities and contract manufacturing can be seen as industries that build this type of ecosystem around the services they provide.

In general, service companies don’t have research & development departments. They do have manufacturing, or a service operation and a client base. Innovation serves to optimize these assets. Take banks or insurance companies as an example. They have room to innovate their IT-enabled customer-facing or internal processes. Mobile payment solutions or bank cards providing customers with access to all of their financial information, including their frequent flyer miles, are more than process innovations. They enhance the customer experience and potentially provide the financial institution with a differentiating advantage that goes beyond cost-efficiency. To make this happen they will have to have access to an ecosystem of process and data analytics specialists who can map their processes and tap their customer base for innovative ideas.

KLM provides an example of a utility innovating by investing in pilot-training simulator companies or in innovative luggage-tagging technology companies. Or SNCF, the French railroad company taking an equity stake in a small car-pooling service firm potentially providing travelers with door-to-door services, or in a firm that makes electric vehicles available at stations thus differentiating rail from other means of transport in the near future. Both provide examples of service companies that optimize and differentiate their key asset, KLM’s flight operation and SNCF’s train-based system, by investing in their larger transportation (technology) ecosystems.

Retailers’ key asset is their customer base. Innovation for them is geared towards better understanding their customers better and personalized responses to their needs. Data analytics, providing for more refined segmentation or crowd-sourcing are functions that their ecosystems should facilitate. Probably the most appealing example of the latter is provided by Amazon’s highly personalized product announcements, triggered by your past buying behavior or their automatic invitations to review published books.

So, the shape of service-based companies’ ecosystems is oriented towards technology suppliers and customers. Customers are managed so that they will remain in the community the service-based company has created for them. Think the Nespresso example. Technology suppliers are used as the source or enablers of innovative ideas; data analytics providers understanding banking clients, or process analytics providers optimizing manufacturing processes, or, finally, the shipyards for marine engineering and dredging companies to co-design their new ships. In these ecosystems, while predominantly dealing with architectural innovations, the role of IP for innovation protection is very limited. Instead, speed of adoption is essential.

I hope I have given managers in a variety of industries a handle that will enable them to think in terms of developing and managing ecosystems to support the generation, conversion, and delivery of their innovations. The three ecosystem shapes depicted should be seen as ideal forms. Mixed shapes do exist.

Hence, in life sciences we see examples of science-based and technology-based ecosystems merging. The move from drug-based therapies to healthcare solutions consisting of drugs being complemented with adherence-enhancing electronics is a case in point. Or Lego, the famous Danish plastic building blocks company. It provides a perfect example of a merged, service-and technology-based ecosystem with its use of customer crowdsourcing, but also with its toy robotics platforms developed with the help of MIT. As these examples illustrate, a well managed ecosystem can serve as a much needed spark for innovation-based growth.