recognizing the ecosystem phase change

5/28/2018 Recognizing The EcoSystem Phase Change

1/7

Recognizing the ecosystem phase-change:

a guide to four types

Haydn Shaughnessy

W hen observers analyze the success and failure of companies they usually do it with

the benefit of hindsight. So, conventional wisdom is, in the case of a company like

Kodak that recently emerged from bankruptcy, management should have known

their core film business would be disrupted by digital technology. And therefore

management is culpable for not wholeheartedly embracing that new business and

transforming itself from a photographic film company to a digital camera and technologycompany. But, in fact, Kodak invested in digital innovation early on, even briefly taking a lead

in digital camera technology. So what rift in the market did Kodak not see?

In essence, the question is, whats the distinction between innovations that alter market

position and those that give rise to entirely new industry ecosystems? This distinction is

important because it offers a different way of weighing how management perceives

opportunities in the light of potentially disruptive innovation, one that can look forward to

anticipate potential phase-changes in industry development. Phase-changes are historical

transitions, ones that create a new industry and consumer ecosystem. They are not merely

disruptive technologies.

What is unique about a phase change?A phase-change is marked by a complex transformation in human behavior produced by a

new way to satisfy consumption needs. By that definition, the transition to a digital economy

is a phase-change, but for example the invention of a high resolution display for

smartphones and cameras, essential to the growth of the digital economy, is not. In the case

of Kodak, for two decades the company worked on the technology for improved displays

and cameras, but because they didnt commit to create a product and an ecosystem that

altered the behavior of their customers, and did not attempt to attract a new community of

suppliers and partners, the effort did not become part of the current phase-change.

By learning to understand industry phase-changes a company can gain insight into where it

is on its development trajectory and make better judgments of how to invest and to manage

transition.

The ecosystem era

A current phase-change sweeping many business sectors is driven by the growing search

for competitive advantage through connected ecosystems of stakeholders that co-create

value customers, innovators, partners and communities. Co-creative ecosystems are a

phase-change that requires a new set of executive and management skills, a different

culture, a new approach to information, as well as new forms of leadership. In many

companies this phase-change involves the transition from product-centric to service-centric

DOI 10.1108/SL-09-2013-0074 VOL. 42 NO. 1 2014, pp. 17-23, Q Emerald Group Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 17

Haydn Shaughnessy

([email protected]),

a Research Fellow at the

Center for Business

Transformation, University

of California at Irvine and a

25-year veteran of the

hi-tech industry, is the

author ofThe Elastic

Enterprise(Telemachus

Press, 2012) and a

contributor to Forbes.com.

He is currently developing a

new framework for

innovation he calls The

Fluid Core.


2/7

organizations and the growing use of external talent in the form of social networks, open

innovation platforms, design agencies, innovation agencies, or corporate venturing.

Understanding ecosystems as a phase-change

The classic platform and ecosystem business is Apple with its iPhone and App Store one

product, 500,000 developers. Yet, there is still, a poorly distributed understanding of how

ecosystems form and how to manage them.

Observers judging corporate performance in five years time will almost certainly say that,

with the benefit of hindsight, more companies should have developed platform and

ecosystem strategies faster. In reality, companies should have been taking a more

ecosystem-oriented approach to business for at least a decade the groundbreaking iPod

and iTunes is 12 years old.

Externalization of core processes is a primary characteristic of this phase change. In the

past, when the goal of externalization was chiefly low cost or efficiency it was simply called

outsourcing. But Apple does not outsource apps development. It leaves that to a

self-motivated and self-sustaining ecosystem, with which it has built mostly automated

relationships. It is an externalized activity driven by innovation.

Such external ecosystems include not only developers, fans, or content providers directly

involved in the product or development process but also the information services around the

core activity in the case of Apple that can be websites like MacUser, The Unofficial Apple

Website, Macrumors, and the mainstream press, of course. The Apple app economy works

because it has this substantial information economy baked in.

Ecosystems are just part of a three-step phase-change in the western model of wealth

creation. Exhibit 1 illustrates the sequential series of changes leading from the old industrial

economy, from about the mid-1980s, through the interregnum of the service economy to

where we are now a creative, elastic, connected and adaptive economy where product,

service, software and communications come together. This last phase is where the business

ecosystem drives competitive advantage.

Business ecosystems

In recent years, business ecosystems for open innovation, customer co-creation of value

and stakeholder communication have proliferated. But its worth noting that a number ofsuccessful business ecosystems go back to the 1990s; Microsoft, for example, has 75,000

Exhibit 1 The transition to a continuously creative economy

Source: Haydn Shaughnessy (July 2013)

INDUSTRIAL SERVICE ELASTIC

PAGE 18 jSTRATEGY & LEADERSHIPj VOL. 42 NO. 1 2014


3/7

companies in its phalanx-like marketing of enterprise technologies and solutions. Todays

ecosystems however are different.

The difference is often a matter of nuance but the nuances are significant. They give a clue to

the success factors. Modern ecosystems come in four major types:

B Scale ecosystems.

B Creative commons/open source ecosystems.

B Customer ecosystems.

B Systemic ecosystems.

Scale ecosystems rapid scale and flexible downsizing

1. Apple: the Apps developer ecosystem helped sell the iPhone to a broad public and is now

spearheading Apples enterprise growth by attracting developers with a platform

designed to create opportunity.

2. Android: a much lighter touch open ecosystem originally based on open source

principles, Android attracts developers in through the core principles of openness.

Google invests lightly. However it has its own agenda to exploit the Android ecosystem

initially via ads, then apps, and now through device sales.

These ecosystems are largely a vehicle for scaling business and they are designed to

effectively remove transactional friction. Other attributes include:

B Talent attraction cultures that high-quality producers/developers want to work within.

B Egalitarian relationships by and large one set of clearly defined rules applies to all

participants.

B Peer-like leadership in many cases external ecosystems want to work with

organizations led by people who have a strong peer-like presence, first among equals

capable of understanding their issues and able to communicate that in a non-patronizing

way.

B High-quality ingest. Both rely on a fault-free software and services platform that allows

participants to upload product and content to a public arena such as the App Store

without friction.

B Seamless transaction/commerce engines with transparent payment rules so that the

business revenues are clearly understood and always executed.

B Automated contracting very low cost bilateral legal arrangements that can be signed of

under terms and conditions to create friction-free business relationships.

B Strong information/communications control and influence.

Creative commons ecosystems

Creative commons is a legal framework for sharing copyright. Many writers and artists share

work under creative commons licenses, as do corporations. In the ecosystem approach to

business, creative commons licensing is being used to take friction out of intellectual

property development. Autodesk provides a classic example.

Phase-changes are historical transitions, ones that create anew industry and consumer ecosystem. They are not merelydisruptive technologies.

VOL. 42 NO. 1 2014 jSTRATEGY & LEADERSHIP jPAGE 19


4/7

During the 30 years Autodesk has led the market for CAD/CAM software, it grew a

professional community of 12 million engineers and designers. Three years ago the

company decided to grow, by acquisition, a community of non-professionals, which

now numbers 120 million. All of them have access to a redesigned set of design tools,

for free. New, spontaneously generated communities have evolved around the

hardware[1].

As another consequence, the open hardware movement has accelerated. For example, the

independent community of engineers at GrabCad, which now numbers 800,000 members,

make use of Autodesk tools to create a shared repository of mechanical engineering

designs. GrabCad has also created new file sharing tools so that mechanical engineers can

share 3D images via mobile with clients and colleagues. The growth of such communities is

leading rapidly to an open hardware movement with Autodesk at the center ready to

monetize this activity. All that activity, however, would be impossible without creative

commons licensing[2].

Key factors:

B Promoting participation among autonomous communities.

B Friction-reducing legal arrangements.

B Introducing the sense of a progress forward, in this case a democratic movement to

change the way engineering is done.

B Paying the goodwill forward creating conditions where the rewards are real and

substantial but they come later.

Customer ecosystems the agile edge for B2B

In many companies the concept of a customer ecosystem usually refers to a social network

of product users who participate in activities and want to share their experiences. However

customer ecosystems are also prevalent and growing in B2B companies because they

improve agility and development times.

For example, the mobile microchip design experts ARM have built a significant business on

being the repository of design and innovation in mobile processors. Most other value-added

functions rest with their clients who are all, in some sense, a partner[3].

Nokia Siemens Networks, the telecoms infrastructure group recently bought out by Nokia,

has traditionally been a labs-to-market company building its own IP that it then uses

market muscle to sell to customers. Today it is much more likely to try to bring customers

in to the development process and to find partners whos IP they can mix with their own.

This is an ecosystem of peers, pooling resources for rapid development and improvedagility[4].

The antecedents of such ecosystem-building can be seen in standards committees. They

are also visible in Proctor & Gambles (P&G) open innovation initiatives like Sparc. Proctor

& Gamble is a model for how to create open innovation input for its labs but there is much

more to P&Gs innovation architecture than that. One important strand is the pervasive

search for new information on any expert, group or compound, or adjacency developments

that might improve a P&G product. In this approach too, information is the critical

resource[5].

A phase-change is marked by a complex transformation inhuman behavior produced by a new way to satisfyconsumption needs.



5/7

Needs/advantages of innovation ecosystems:

1. Strong, prior partner and collaboration experience.

2. Leading edge R&D.

3. 360-degree information resources.

4. Peer-like relationships even with smaller companies.

5. A strong IP portfolio and good IP protection mechanisms.

6. Downstream participation to promote the rapid uptake of innovations.

Systemic ecosystems change the world

The incipient electric car industry is tiny part of a century old gasoline-based auto service

system that the innovators have largely failed to change. The gasoline-based system has

garages, petrol stations, high speed motorways, and strong cultural roots. Electric cars have

made some headway in creating a comprehensive alternative system but they havent been

able to get a critical mass of customers to change their behavior. Hydrogen fuel cell cars,

which have more benefits than electronic, are even further behind.

The lesson for other innovators is, many business sectors are in fact systems and to compete

against them means having equal systemic resources.

A good example of systemic change is the ten-yearly upgrade of the mobiletelecommunications networks globally. Most participants have experience in standards

setting so are accustomed to turning the ship. Alcatel Lucents promotion of LTE for 4G

also brought new players like the auto-companies into the mobile ecosystem and should be

judged a success even though 4G is often a compromise. Creating an information layer

around LTE was critical to this (see Exhibit 2)[6].

Key factors:

B The capability to convene large groups of interested parties.

B Peer-like relationships.

Exhibit 2 A partial description of the mobile ecosystem

Players

Markets

ChipVendors

Home

device

markets

Device

sales

Embedded

device

markets

Mobile

advertising

revenues

OSdevelopers

Nokia

Ovi

Appsstore

Search

Apple

Google

Toolsdevelopers

Appsdevelopers

Contentdevelopers

Solutionsecosystem

Functiondevelopers

End-usercommunities

Ecosystem brands

Services

Geodata/AR

Location

basedservicesMaps

AR

Content

Networkoperators



6/7

B Creating the information layer.

B The vision or movement.

Ecosystems in action: reinterpreting a classic business case study

Kodak is often cited as a classic business case study of an incumbent disrupted by innovation.

But in my opinion, it is a misunderstood case. Arguably, Kodak was disrupted by its lack of

understanding of ecosystems management. In the early 1980s, when Kodak first squared up to

the threat of digital, the company was actually a highly inventive, innovative powerhouse. As

evidence of the value of its achievements, Korean giant Samsung has a whole line of business

built on Kodak IP. Its called OLED or organic light emitting diodes. OLED is an alternative to

LCD, or Liquid Crystal Display technology. Samsung uses it in its Galaxy S4 smartphones and

its TVs. The market, ultimately, could be worth tens of billions. It was Kodaks to lose[7].

The reason Kodak lost the market opportunity is not complicated. Kodak had a labs-to-market

innovation model. Being in an oligopoly industry most of the film industry was split between

Kodak, Agfa and Fujifilm Kodak could afford large R&D investments, confident that it could

force the necessary consumer and professional innovations onto the market through its

marketing budget and its experience using mass market channels like TV. In areas where

Kodak could have grown new business, however, its oligopoly culture played against it.

Though it was a leader and inventor in OLED, this technology could only become a viable

competitor to LCD if certain critical developments were funded. For example, a partnerneeded to be willing to make huge investments in clean room manufacturing, plus have the

ability to innovate manufacturing to take account of the unpredictability of organic

compounds, plus invest in production facilities for the organic compounds and plus develop

new devices such as mobile phones.

Its clear this investment and development process requires a system-level ecosystem, in

effect a phase change in the industry model, and ultimately a transformation in consumer

behavior produced by a new way to satisfy consumption needs. The immediate problem

was that Kodaks licensing terms for its OLED technologies were too expensive to attract

partners. Kodak overpriced and would not budge despite the fact that it needed ecosystem

partners with a willingness to make complicated and risky investments[8].

That meant instead of growing its own ecosystem of interested parties it incentivized the

growth of a competitor one. Samsung took the challenge on by licensing some Kodaktechnology and then developing and seeding its own ecosystem.

Samsung now owns IP in many of the materials manufacturers in OLED (Novaled) or has

secured long-term supply agreements (Universal Display Corporation), and in LCD

(Nanosys)[9]. An alternative future for Kodak would have been to sit in the middle of the

OLED industry as smartphones embraced its color-rich displays. Right now it is emerging

from bankruptcy with a plan to be a source of different types of screen display layers, which

is not a vastly different scenario.

Conclusions

Ecosystems are part of a phase-change to a new type of economy, in effect a new wealth

creation system. There are certainly four different types of ecosystem, maybe more. They

require new executive skills.

Briefly summarized, here are the eight traits common to all four:

1. Goodwill before ROI. Playing goodwill forward, a new approach to ROI.

2. Movement not argument. Building the movement, working for or with a groundswell of

change, rather than arguing a case for your product.

3. Peers before generals. Having leaders who have strong peer-like credentials with the

target communities.



7/7

4. Partnership not competition. Being able to combine IP across a sector.

5. Patent smarts. Having a strong, defensible IP portfolio.

6. Information generation. The capacity to create new information layers around the

movement or product.

7. Narrow and broad. Good long-tail or narrow innovation capabilities.

8. Easy to use.Automated, friction-free business relationships.

There is though a broader strategy context that comes through from these cases. Key

strategy needs:

B An externalization strategy companies need to ask how they manage and benefit from

the external environment.

B A seamless platform many ecosystem plays need a strong software and services

platform to support participants.

B Strategic agility or fluid core management companies need to ask how they can

adapt to the phase-change we are going through and the answer is to adapt core

competency to fluid core competency, being able to redefine roles to support and

promote the interests of complex partnerships that they cannot control.

Notes

1. Haydn Shaughnessy, Autodesk 120 million reasons why the future lies with makers,

Forbes.com, June 17, 2013.

2. The Creative Commons movement at creativecommons.org has a special section on Autodesks

move into cc licensing http://creativecommons.org/weblog/entry/39184

3. Information on the ARM business model can be found on the ARM website. In summary ARM does

not manufacture processor hardware. Instead, ARM creates microprocessor designs that are

licensed to our customers, who integrate them into System-on-Chip (SoC) devices. http://

infocenter.arm.com/help/index.jsp?topic /com.arm.doc.dht0001a/CHDIBGAI.html

4. Haydn Shaughnessy, The Fluid core: how technology is creating a new hierarchy of need and how

smart firms are responding, June 2013, published by Cognizant. www.cognizant.com/

InsightsWhitepapers/The-Fluid-Core-How-Technology-Is-Creating-a-New-Hierarchy-of-Need-and-

How-Smart-Companies-Are-Responding.pdf

5. Haydn Shaughnessy and Procter and Gambles Chris Thoen on Open innovation, innovation

management, April 2011, www.innovationmanagement.se/2011/04/21/procter-and-gambles-

chris-thoen-on-open-innovation/

6. The development of LTE has been a notable successful application of good information distribution.

See these Global Suppliers Association reports: www.gsacom.com/gsm_3g/info_papers.php4

7. The OLED market is covered in this wiki page: www.dolcera.com/wiki/index.php?titleOLED_

Mobile_Phones_Market_Research_and_Analysis_Report#OLED_Market:_Revenue_Overview

Estimates for 2014 are $ 7 billion in global sales of OLED displays.

8. Haydn Shaughnessy, The American Company Samsung Relies On For Success, Forbes.com,

16 April 2013.

9. Ibid. and Haydn Shaughnessy, The technology that could put Apple back on top, Forbes.com,

28 June 2013.


To purchase reprints of this article please e-mail: [email protected]

Or visit our web site for further details: www.emeraldinsight.com/reprints

recognizing the ecosystem phase change

Documents