Wharton@Work

January 2020 | Strategy

To Succeed in a Business Ecosystem, Change Your Mindset

Business ecosystems were once the domain of tech firms. In the past couple of years, though, companies in every industry have begun thinking about how to transform as software and IT firms have. They are building and leveraging multi-firm arrangements that can provide them with quick access to new capabilities and resources. That means learning how to succeed with ecosystems has become important not only for growth, but even for survival.

The first step, according to Wharton management professor Rahul Kapoor, a global thought leader on business ecosystems, is adopting a new mindset. “The biggest risk I see in my research and teaching is when companies take traditional supply-chain or value-chain perspectives and apply them to an ecosystem. That approach causes them to miss out on value creation. Supply chain and value chain are significantly different from an ecosystem perspective.”

In his session in the Managing Strategic Partnerships and Ecosystems program, Kapoor focuses on helping participants make that mindset shift. It begins by understanding the differences between traditional thinking on value creation and the ecosystem perspective. He says the value-chain concept understands competitive advantage in terms of a set of activities that jointly determine a firm’s cost and the value that its offer creates for the customer, creating a basis for differentiation. Both the value chain and the ecosystem perspectives are explicit about the importance of the demand side in terms of how firms create value and the need to take into account the different “elements” that contribute to value. But while the value-chain perspective takes a micro view of the internal activities that underlie its performance relative to its competitors, the ecosystem perspective takes a macro view of the external actors that contribute to a company’s value creation.

Supply-chain perspective focuses on the coordination challenges between upstream and downstream actors (e.g., suppliers, distributors, retailers, customers). The goal is to manage supply-side interactions in terms of efficiency and responsiveness — without any consideration of the complementarities on the demand side and the structure of the interdependencies between actors.

“Each of these perspectives is valuable in explaining different aspects of how firms compete and create value,” says Kapoor. “For example, Apple has pursued a differentiation-based (as opposed to cost-based) competitive advantage for its iPhone that is enabled by its internal set of activities related to design, R&D, marketing, manufacturing, distribution, and of course, leadership. The company has also drawn on a global supply chain of hardware and assembly suppliers for the development of new generations of iPhone and for matching the supply with demand.”

“But,” Kapoor continues, “Apple has also done something very different in terms of an ecosystem perspective. The company pursued an integrated hardware and software platform that allows app developers, manufacturers of accessories, and other service providers to contribute significantly to the iPhone’s value proposition.”

It is this leveraging of ecosystems that has been a key aspect of how Apple has competed and created value through the iPhone. Kapoor says even firms that develop groundbreaking products or services are dependent on the broader ecosystem to create value. “It’s very important to move away from a focus on the firm or a specific partner, as supply-chain and value-chain perspectives do. Today, value is created when you build and manage ecosystems.”