Digital innovation is changing the nature of competition. For centuries companies offered an alternative value proposition to their competitors by building and managing a linear value chain to integrate as much of the upstream and downstream activities for production and services.

However, due to changes technology is driving, competition today is increasingly about identifying new ways to collaborate and connect rather than simply offering an alternative value proposition. This new model is called a value ecosystem. But it proposes several challenges to companies that want to join and even create value ecosystems. Creating shared value can’t be achieved by little tweaks to the business model, says an expert in the area.

Ramesh Shanmuganathan, the Chief Executive of JKIT and the Executive Vice President and CIO at John Keells Holdings (JKH), Sri Lanka’s largest company, is a leading innovation advocate both in the businesses he oversees and elsewhere. In an interview, he explains the concept of shared value and discusses how companies, large and small, can get about creating it. Excerpts of an interview.

Normally, companies create value in their own value chain. So, what’s this concept of a value ecosystem?

To apricate this we need some context on how value has been created and consumed over the years. How value is created has evolved and that momentum has accelerated in the last three decades due to digital or IT becoming an integral part of many organizations.

In the 1980s, value chains were purely based and driven by the forecast for a geography, a particular demographic, for a particular season, etc. Raw materials were sourced, goods manufactured and shipped to distribution centers and outlets, all based on forecasts. In the past, value chains thrived through a brick-andmortar business model and in a limited geographical area due to constraints mostly in the value chain itself and compounded by the lack of timely information.

Most linear value chains were owned by a single organization or a closely-knit group of organizations with a long-term strategy to create value together. The value adding was linear and driven by forward and backward integration to strengthen their stakes in the value chain. So, the business model of value creations was to create a flow, linearly, from producers to consumers.

The value creation context has evolved over the past three decades due to technology evolution and adaption, hinged on some significant points of inflection which have been caused by the shift to distributed, client/ server computing, enterprise applications and automation becoming the norm. We’ve also seen the internet becoming the universally available, mobile becoming ubiquitous, digital identity gaining confidence with federated identity management, electronic payments gaining momentum, cloud becoming a point of aggregation, data becoming the new oil and many more.

Over the decades these changes have facilitated a rise of complex global value chains. It started with a favourable cross-border trade climate that eased the coordination of multi-country value chains. A dramatic fall in costs, aided by technology enabled value creating functions to move to the most efficient locations. The corresponding rise of enterprise applications helped manage the dispersed value chains across boundaries.

Also increasing digitization of value chains and their stakeholders has provided greater insights about participants in the value chains, allowing them to quickly respond to demand fluctuations. This transformation is made possible by what we call value ecosystems, which bring together diverse stakeholders who can collaborate, co-innovate and co-create products or services without owning or controlling the entire value.

This interconnected network of producers, suppliers, distributors, aggregators, technology providers, outsourcing firms, and a host of other organizations to create value is generally referred to as a Value Ecosystems.

An interconnected network of producers, suppliers, distributors, aggregators, technology providers, and other organizations creating value is referred to as a value ecosystems

How does one build an ecosystem? Who should be the chief orchestrator of an ecosystem?

It’s easier to come up with the idea to build a value ecosystem than it is to executing. Why? It’s because the complexities of execution in a multi-stakeholder environment are far greater than building a linear value chain.

To build a sustainable ecosystem one must ensure that its design delivers and distributes value amongst all ecosystem partners for it to be sustainable. Creating this is compounded by limited hierarchical control in the ecosystem and the need to convince partners to participate, which pose specific governance challenges which are all challenges you won’t find in other value delivery models. You require a critical mass of partners and customers to build a scalable and sustainable model.

Requiring a critical mass leaves established players with an advantage as they may possess a critical mass of customers, which they can plug into an ecosystem to create value versus an organisation that’s starting a greenfield business.

In planning to build such ecosystems there are several questions one must seek to address,

• What’s the problem you are trying to solve?
• Who needs to be part of your ecosystem?
• What should be the initial governance model of your ecosystem?
• How can you capture the value of your ecosystem?
• How can you solve the problem of the critical mass of your ecosystem to sustain itself?
• How can you ensure scalability and the long-term viability of your ecosystem?

The answers to these questions can drive the strategy in terms of how one could build a sustainable ecosystem.

There are two dimensions to the sustainability of an ecosystem – demand-side economies of scale and supply side economies of scale. Whoever has one of the two can be an ecosystem orchestrator provided they are collectively able to create, deliver and distribute value amongst the players for each to realize greater benefits than if they had worked alone.

Often, the party capable of matching demand-side and supply-side economies of scale, and creating a sustainable business model by bringing the constituents together, is an obvious choice to be the chief orchestrator. Of course, the orchestrator must be able to follow though by creating, delivering, distributing and sustaining value for their constituents. Very seldom has the orchestrator been unseated unless the business model itself changes, or they decide to pivot to target different constituents altogether including different customers.

It’s possible for the ownership or value sharing structures to change or for consolidation of two or more ecosystems to create bigger & better ecosystems.

To build a sustainable ecosystem one must ensure that its design delivers and distributes value amongst all ecosystem partners for it to be sustainable

It sounds counterintuitive to suggest that to create value for your company you must first create value for other companies in an ecosystem? How does that make sense?

Yes, it may appear counterintuitive but if you think about it, such ecosystems are common in the natural world. Living organisms interact with each other and their shared environment, competing and collaborating simultaneously, creating and sharing resources, and adapting together when faced with disruptions.

Many of these same ideas underlie business ecosystems and provide key insights into understanding today’s business world where denser and richer networks of connection, collaborative opportunities, common themes, and interdependencies as well as coopetition foster and drive the continuous evolution and thus the competitive advantage for the ecosystem’s players.

That’s why it’s compelling for new entrants to break the mold to create new business models for higher returns, greater agility and market access challenging traditional players. The premise and basis of an ecosystem creation is of shared value for constituents with shared investments, shared resources as well as shared risk. By nature, it’s a complex joint venture but without too many restrictions and exclusions.

Traditional players invest to create end-to-end, linear value chains; a captive means to drive value and control every aspect of the value chain. This is the most traditional approach to control and sustain an ability to create, deliver and distribute value. But with technology evolution and convergence in the world over the past three decades it’s now compelling for businesses to look at alternate means of creating, delivering and distributing value and that too by focusing on what they do best and by partnering others who are best in class in what they do, to create, deliver and distribute value at scale. That need is the mother of all innovation. Today, an organisation can concentrate their assets, resources and investments in one part of the value ecosystem by collaborating, co-innovating and co-creating value which is greater than the sum of the parts, of its participants, by enhancing and enriching the value from the supply side to meet demand with attributes that can add to the product or service which is being offered.

Ecosystems have some built-in advantages and exhibit natural winner-takes-all or, takes most, characteristics. Once they have achieved a dominant market position, strong barriers to entry result from the network effects and scale advantages on costs and data monetization offering a competitive edge.

Ecosystems compete with each other and not with other products or services. Directing strategy will be the ecosystem’s creator who must also ensure multi-stakeholder demand/supply is met and also create, deliver and distribute value at scale and at a pace better than other ecosystems.

For consumer platforms offer mass personalization, wider choice, convenience and offers an opportunity for partners to contribute to grow the value that the ecosystem can create, deliver, and distribute and thus creating a bigger, larger and more sustainable ecosystem by leveraging its network effect.

How does an organisation get about building a value ecosystem or plugging into one?

For established organisations, it entails a new normal – disruption and risk. Established players can certainly take a page from the startup playbook and start incrementally, with a concept of a “minimum viable product”. They can drive and accelerate business transformation iteratively in whatever they do and then scale it, if it works, or pivot as necessary.

Traditionally, organizations have grown organically or through mergers and acquisitions, and used divesture as a strategy to manage value created, delivered, and distributed. The key motivator for these would be key strategic objectives such as quests for synergy, market share, cross-selling, economies of scale, tax advantages, geographical expansion, diversification, vertical integration, horizontal integration, liquidity, etc.

Today for organizations, joining an ecosystem is a compelling reason to fast track their digital transformation. What I would add here is that a new normal approach can pave the way to unlock new partnerships in the ecosystem without the burdens of ownership.

A design thinking led approach is a powerful way to reimagine your business, and to reassess your process of value creation, delivery and distribution. Together with other tools such as journey mapping, blue ocean strategy assessment and strategy canvass will be helpful for you to integrate ecosystems thinking as key attribute of your strategy. This will then help you identify opportunities where you could leverage an existing or a new ecosystem that can help to create better value with optimal return for your investments. This of course would be a journey similar to that of a start-up, where you start with the Minimal Viable Ecosystem (MVE) for your organization and then iterate or pivot as necessary in line with your business context and strategy.

Today, an organisation can concentrate their assets, resources and investments in one part of the value ecosystem by collaborating, co-innovating and co-creating value

What are possible threats to an ecosystem and how can one defend against them?

Defending an ecosystem is challenging because competitors may target either the demand or the supply side of the market. There are four possible threats an ecosystem can face.

Multihoming: This happens when suppliers or consumers participate in multiple competing ecosystems at the same time, or easily switch between ecosystems. Restaurants may find it attractive to offer their dishes on multiple food-delivery platforms, for instance, and consumers use different hotel-booking platforms to chase the best offering. Multihoming is a particular risk for an ecosystem if switching costs are low.

Disintermediation: This happens when partners from two sides of a transaction ecosystem bypass the matching platform and connect directly. A person who is happy with a service provided by a partner can directly contact the partner for the services rather than going through the ecosystem.

Differentiation: This happens when a subset of users has distinctive needs or tastes that can support a separate ecosystem and take away market share from the dominant player.

Ecosystem carryover: This happens when a successful business ecosystem expands into an adjacent domain which is inevitably an important route for ecosystem growth and expansion.

Today technology plays a huge role in creating a level playing field – while offering new ways of exploiting network effects of platforms and ecosystem. It also makes it more difficult to defend an established position unless you are continuously innovating to stay ahead of the game. The business models enabled by technology have lower entry barriers than traditional brick-and-mortar businesses and it’s possible for anyone with technical know-how to create a digital platform or ecosystem, but everyone doesn’t have the strategy, the partnerships and stickiness to create, run, scale and evolve to stay relevant with times. That’s the key reason you see established ecosystems challenged by new players with better concepts and more exciting offerings. That’s what will drive innovation and keep ecosystems live and kicking.

In order to defend an ecosystem an organisation must ensure that it is designed for evaluability, sustainability and viability. The several attributes to assess in this regard are,

• What is the demand-side economies of scale that you would benefit from?
• What are the supply-side economies of scale that you would benefit from?
• What is the impact of the multihoming, disintermediation, differentiation, eco system carryover on the above two?
• Any other factors that can impact your ecosystems such as regulations, restrictions, etc?

It’s important to have the best product or services, best platform and the best ecosystem to defend your turf like any other business. There is no short-cut to success.