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Ecosystem Innovation: New Age Business Models

5/31/2011 --

In this commentary, Ross professor M.S. Krishnan describes a new wave of business value that is unfolding due to innovation and efficiency through digitization.

ANN ARBOR, Mich.—Ubiquitous connectivity, pervasive digitization of business, and emerging social networks are challenging the traditional assumptions behind business models. We are witnessing a fundamental change in the approach to value creation in business.

Three years ago, I co-authored my book The New Age of Innovation with the late professor C.K. Prahalad. We argued then that the structure of business models was morphing, and businesses across industries were moving away from products and services to more personalization of unique experiences co-created with customers. We claimed that to orchestrate such unique experiences, firms must connect to a global resource network of suppliers and individuals. I find this trend in business models more pronounced now with the expansion of online cloud-based platforms from the likes of Apple, Google, Amazon, Facebook, and Microsoft. These platforms enable businesses to build ecosystems to connect with their customer communities, employees, suppliers, and partners. There is a new level of transparency to market opinions on products and services. Apple, Groupon, and Amazon are examples of such business ecosystems that connect millions of customers to thousands of content creators and other partners. This is not limited to technology firms. Ecosystem-based business models are emerging across industries.

A biological ecosystem is defined as an environment that supports a set of living organisms and non-living objects to mutually co-exist, interacting with each other and with external entities. We are now witnessing the emergence of business model ecosystems that connect a set of people, devices (with embedded intelligence), and businesses on a digital platform for value creation. These business ecosystems are supported by contracts and collaboration practices for mutual benefits.

The devices in these ecosystems are not limited to smart phones and tablets. They include appliances, automobiles, and intelligent sensors in various kinds of products. Automobile firms use their vehicle systems as platforms for customer connection. For example, Toyota and recently announced a platform called Toyota Friend to support a social network of drivers and their cars. General Motors' OnStar enables an extended engagement with customers through personalized vehicle reports, reminder messages, and location-based services. Auto manufacturers are not far from engaging in new partnerships with content providers, media firms, and other ecosystems to transform our experience in the vehicle to a new level of personalization. The automobile as the product will remain embedded as a part of the overall customer experience.

Such ecosystems are emerging as a critical asset in the success of business models in industries ranging from healthcare and education to entertainment services and traditional Rust Belt products. Ignoring this trend can seriously impact business success. Blockbuster was slow in migrating its traditional business model to the online platform. Netflix succeeded in providing a personalized and convenient service to its customers through its online business ecosystem of content partners, customer communities, device manufacturers (such as Nintendo, Sony, and Samsung), and logistics players. This transformed the movie rental business.

No industry is immune to this change. Amazon recently announced that the sales of their digital books have already surpassed traditional printed books. The impact of this change now expands beyond book retailing to the publishing industry. In the telecom industry, the traditional voice telephony service is now free! The business ecosystems of Apple and Google (on the Android platform) through smart phones and tablets have redefined the notion of customer value. Telecom companies are competing to discover their business models through new partnerships with device makers and content creators. Such partnerships were never envisaged in the long history of this industry.

There are several experiments in progress to develop applications and business models to enhance healthcare and education experience on these new platforms. Managers across industries need to understand how these ecosystem innovations may transform their businesses. These ecosystems-based business models are also more efficient and environmentally sustainable. For example, Microsoft and Des Moines-based GCommerce have built a cloud-based platform to connect more than a thousand suppliers and buyers in an after-market auto parts business to drastically improve the inventory levels and drop shipment rates.

These ecosystems also expand the size of the pie by creating new markets. Zipcar, one of the leading car-sharing networks, is an ecosystem-based model that offers college graduates and urban drivers a choice of access to wheels on their own terms. This may be far more efficient and convenient than the traditional high cost of car ownership for some who may not own a vehicle.

The business model of Groupon that connects millions of customers and merchants is transforming traditional effectiveness and efficiency of coupon-based marketing, and also helping the environment by significantly reducing junk mail. These ecosystem business models in the cloud democratize the access to information and opportunities. It is now possible for an unknown author, a software developer, or an artist to play in these ecosystems and thrive. A new wave of business value in innovation and efficiency through digitization may be just unfolding.

How are these ecosystem business models different from traditional approaches to business models? It is the shift away from a transaction-based episodic connection with the customers and partners to a continuous engagement in collaborative terms. It is the shift away from products or services to enhancing experiences for customers and partners in an ecosystem connected in a digital fabric. These ecosystem business model innovations rest on a new capacity for agility within the organizations. Managers need to assess their internal capabilities and impediments with care before venturing into these models. These business models call for a shift from long-term efficiency-oriented contracts to a new level of flexibility in a Velcro-like partnership that aligns the interests and incentives of all partners on a need basis.

In addition, there is a need for a shift from an episodic product- or services-based connection with customers to a bold and transparent engagement with customers and suppliers as partners in the co-creation of value in the ecosystem. The concept of co-creation in business introduced by my colleagues Prahalad and Venkat Ramaswamy is a prerequisite in these models. Future corporate employees and customers are being socialized in such ecosystems in their high schools and colleges now. Their expectations will be different as consumers and employees. Businesses need to rethink their social architecture, incentives, and values to empower these employees. The traditional notion of hierarchy and control is unlikely to work.

Finally, managers need to embrace information technology as an enabler of business innovation. The traditional view of IT and CIO function in a support role needs to change. As these ecosystems thrive on the new capabilities of technologies, talent that combines business and technology knowledge will be at a premium.

Written by M.S. Krishnan, the Joseph Handelman Professor of Information Systems and Innovation.

For more information, contact:
Bernie DeGroat, (734) 647-1847,