What is a digital ecosystem? – Understanding the most profitable business model
Digital Ecosystems made the most profitable companies in history - Understand the implications and what they are about
Amazon, Google, Apple & Co. grew their own digital ecosystems. We explain what digital ecosystems are and what roles you can have as an individual and as a company to participate or create own ecosystems in the digital world.
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
If you look at the most successful digital ecosystems (I mentioned Amazon earlier), you can see that they are strictly focused on value creation. Sometimes these ecosystems didn’t even have a monetization model in the beginning because they focused on the customer and understanding the customer, as we will learn in the next chapter on data, before they even start putting a price tag on services or offerings. Customer centricity is not just about the customer service or personalized advertising/marketing that the company provides, but about the full spectrum of customer centricity that is only possible because of the size of the company. This means holistic operations and collaboration across departments, products and services to integrate the customer journey as best as possible.
One of the main benefits of using a digital ecosystem is the ability to gather more information about processes, customers, transactions and more. This makes data one of the most important factors for any digital ecosystem. The more you know about your customers, the better you can provide services, software, technologies and tools to improve the customer journey.
Because of the tremendous insights digital ecosystems gather from customers, suppliers, and third parties, it is also possible to make those insights actionable. Automation is one of the key elements when it comes to lowering price, improving customer satisfaction, but also offering new services/products to increase the value stream.
You may have guessed that a global footprint is necessary. Digital ecosystems are there to scale, and if you limit them to one country or region, you will never reap the benefits of a platform and ecosystem. This means that digital ecosystems must also be built to enable collaboration across countries, geographies, and even languages. Sometimes even cultural barriers need to be overcome.
Because of the size of digital ecosystems, it’s also worth noting that the mindset needs to be very dynamic. Ecosystems need to adapt quickly and respond quickly to changing market dynamics, otherwise the user base will move on and change platforms. Business intelligence, rapid decision making, and also the use of new technologies and business models must be at the heart of every decision.
3 roles in a digital ecosystem
Before you start envisioning how you’ll build an ecosystem, you need to think about your business and your offering. This also means you need to figure out which ecosystems are important to you and what role you will take in which ecosystem.
There are generally 3 different roles your business can take in an ecosystem.
These companies take on the risk, complexity, and also the challenges of building a digital ecosystem. These are companies like Amazon, Alibaba, Ping, etc. that enable others to participate in an ecosystem and sell goods and services through that system.
These are companies that contribute to the ecosystem and monetize value in different ecosystems. One of the best known modular producers might be PayPal. Its service allows different platforms and ecosystems to use a unified payment gateway so customers can pay easily. A modular producer can add core services to ecosystems that meet the needs of consumers, businesses, as well as buyers and sellers.
The customer can be a person or a business, and they derive value from the ecosystem. When you book on Airbnb, you are a customer of the ecosystem that Airbnb has created and orchestrated.
The lines are sometimes blurred. For example, someone using Facebook is both a creator (content) and a consumer (advertising). In addition, companies may use, orchestrate, or add services to multiple digital ecosystems.
3 Types of Digital Ecosystems
Functional Digital Ecosystem
This is one of the simplest ecosystems and is usually built around an existing product or offering of a company. It has a limited number of participating companies and partners (maybe 10-100) and is very focused on the internal aspect. Due to its simplicity and ease of integration, it is also the most widespread ecosystem we can find in the world. However, there are also limitations as data collection and further integration are complicated as it is mostly a closed ecosystem.
Examples of these functional ecosystems can be found in the automotive industry, where platforms are connected with the digital services of the partners involved to create a very product-oriented ecosystem of a smart and connected car, usually limited to a limited number of products.
More advanced ecosystems are the digital platform ecosystems. They can encompass millions of partners and include a variety of digital offerings. This digital ecosystem is based on a “data first” approach to leverage customer insights and develop new offerings or upsells based on the data gained. However, the biggest differentiator is the common platform that all partners participate in and create value on. So the ecosystem orchestrator provides a common platform on which all connected parties collaborate.
Google Home is a good example of this. Google provides a common platform where developers, manufacturers, and engineers can collaborate to create home appliances that use the Google Home platform to become connected and smart. Google itself develops devices like its Home speaker, but partners can also use the platform’s ecosystem to offer their products and services.
Super Platform Ecosystem
One of the most complex and complicated ecosystem models involves integrating different platforms and leveraging different user journeys, including their data. Super Platform Ecosystems usually encompass many different industries and services and try to connect the entire User Journey to the ecosystem as much as possible. Most super platform ecosystems today are owned by tech giants such as Apple, Google, Amazon, Tencent and several others.
WeChat, the Chinese super app, is a perfect example of creating a super platform ecosystem. The app now covers all major aspects of users’ lives. On a single platform, it offers thousands of services and functions, including everyday banking, social media, shopping, communication, and more. With each new offering, WeChat is able to integrate more into daily life, enabling better data collection that can lead to new offerings and “lock-in.”
Challenges and Risks of Digital Ecosystems
So far, we understand that while digital ecosystems have tremendous potential for value creation and growth, they also bring with them a unique set of challenges and risks due to their size and complexity.
Through various scandals currently, of course, One of the main issues is data privacy and security. Given the vast amounts of data being tracked, shared, and processed within the ecosystem, there is a significant risk of data breaches, misuse, and of course cyberattacks wanting that data. In addition, dependence on one or a few platform providers can lead to monopolistic control, which in the long term limits competition and innovation, and current currents are also trying to prevent this from happening regulatory-wise.
For providers in an ecosystem (modular producers), there is also a risk of becoming too dependent on the ecosystem for their business, which makes them vulnerable if the ecosystem fails or changes significantly. We had observed such problems for communities and companies with Twitter and Reddit.
For an ecosystem orchestrator, a bigger challenge but also a risk is also the interoperability of the different technologies and systems within an ecosystem. Inconsistent or incompatible technology standards can have a strong impact, so it is not surprising that Google, Facebook, etc. set their own technology standards and develop them themselves.
Depending on the business model, regulatory requirements are also a challenge. As digital ecosystems are complex and global and regulations regarding data protection, compliance, antitrust and other relevant policies need to be constantly monitored and implemented, countries are often excluded from various services.
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.