One of our most important strategic thinkers for the twenty-first century. —JIM COLLINS, author of Good to Great and How the Mighty Fall, coauthor of Built to. Shop scary movies, video games and more for Halloween In this book, strategy expert Ron Adner offers a new way of thinking, illustrating breakthrough. As Ron Adner notes in an excellent new book, car companies are not just Two years ago, remote work was more of a theoretical prospect. FOREXPROSTR COMMODITIES GOLD STREAMING CHARTS

I have reviewed his current book, Winning the Right Game as well. This is a book that should demand your attention, its insight has not diminished with time. I am using the tools in the book to develop, test and communicate new ideas about digital platforms, ecosystems, and company interactions. This book proves the point that valuable ideas matter, regardless of when they are first published. Highly recommended in this future dominated by platforms and ecosystems.

The central premise of the book is that the ultimate success of an innovation, or any company for that matter, no longer depends on the company alone. Success rests increasingly in your ability to recognize and align the critical partners on whom your success depends. The book is clearly organized, centered around deep and illustrative case studies and provides tools that you can apply to your own strategies and decisions.

This is a unique and extremely helpful combination — one that is also rare in terms of business books. The chapters and tools include: Chapter 1: Why things go wrong when you do everything right? The chapter discusses the need for system change in the success of innovation and how seemingly disconnected players can undermine the value realized from new products or services. Th chapter contains a discussion of ways to think through the ability to create and manage innovation ecosystems that are the foundation of competition.

In this chapter, Adner introduces the components required for innovation and the probability of these success. Chapter 3: Adoption Chain Risk: discusses how you see all the customers before your end consumer. This chapter talks about the chain of players who need to be considered in launching an innovation, their potential motivations and examples of strengthening adoption chains. This chapter helps you identify the real ecosystem and players involved in your success. Chapter 4: Mapping the Ecosystem: identifying pieces and places.

Concentrates on creating value blueprint maps among the players in an ecosystem to help identify how each player benefits or may be unwilling to contribute to your success. Chapter 5: Roles and Relationships: to lead or follow in the innovation ecosystem? Who would have guessed 20 years ago that posting selfies, photos of your food, and cat videos is such a deep human need that multibillion-dollar businesses like Instagram and YouTube could be built on them?

The value potential from addressing an unmet need is difficult to predict but potentially very rewarding, because there is initially no offering to compete with. By contrast, removing an existing friction is more predictable. The ecosystem value proposition is a function of the size of the friction, the share of the friction that can be eliminated by the ecosystem solution, and the willingness of customers to pay for it.

Take, for example, Better Place, a startup founded in to build an innovative ecosystem-based solution to power electric vehicles EVs. Its breakthrough idea was to separate car and battery. In this model, the driver purchases a car without a battery, while Better Place owns the battery and charges a mileage-based monthly fee for leasing, charging, and exchanging it.

In this way, Better Place could solve several fundamental problems of existing EV offerings: Because Better Place owned the battery, the EV could be offered at a competitive price, and the risk of obsolescence and low resale value due to advances in battery technology was eliminated. Because Better Place built not only charging infrastructure but also switch stations that could exchange batteries in a matter of minutes, the problem of limited driving range was also addressed.

And finally, Better Place also solved the problem of electric grid capacity, because as the orchestrator of the EV ecosystem it could balance the power demand from cars with grid capacity. Better Place was thus able to remove substantial frictions and offer an enormous benefit to the world. However, as we will see, the ecosystem failed because of other weaknesses in its design. The specific value proposition of a business ecosystem is context dependent.

For example, frictions in traditional retail were much higher in China than in the US, because China had no significant retail or payments infrastructure and it was difficult for consumers to get access to many products they were looking for. This explains in large part the success of transaction ecosystems like Taobao and Tmall, which largely removed these frictions. In a similar vein, B2C ecosystems are typically easier to establish than B2B ecosystems, because many existing B2C relations suffer from relatively high transaction costs, while B2B offerings are more likely to be characterized by mature companies with optimized professional relationships.

In fact, by that year, almost all B2B marketplaces in the US had disappeared. The bubble collapsed mainly because the problems that could be solved through these marketplaces were just not important or big enough. Again, the situation was different in China, where the lack of infrastructure made it difficult for a business to find partners, a problem that Alibaba largely solved.

However, we also believe that advances in sensor technology, cloud computing, and data analytics will make it possible to address new and bigger problems, and IoT-based business models will likely fuel the next wave of B2B ecosystems in the coming decade. Is an ecosystem the right choice? The next question that must be answered is whether an ecosystem is the best way to realize the business opportunity.

Ecosystems compete with other governance models, such as vertically integrated organizations, hierarchical supply chains, and open-market models. There are many examples of business opportunities that are not well suited for an ecosystem model. Who wants to fly in an aircraft that was built by a loosely coordinated ecosystem of companies? In this case, the complexity and integrated nature of the design, and the need for utmost attention to safety, favor an integrated model or a hierarchical supply chain.

On the other hand, many business opportunities do not require a business ecosystem because they can be realized in an open-market model. For example, if Saeco launches a new automatic espresso machine, the required coffee beans, water, and power supply are generic complements that consumers can purchase in the open market and then combine on their own.

Sometimes the best governance model is not so obvious—or can change over time. What kind of ecosystem do you need? Not all business ecosystems are created equal. Some business opportunities are best organized as a solution ecosystem, which creates and delivers a product or service by coordinating various contributors. Others are best set up as a transaction ecosystem, which matches or links participants in a two-sided market through a digital platform.

And some are best organized as a hybrid, combining elements of a solution and a transaction ecosystem. It is important to be clear about the type of ecosystem, because the types differ not only in their structure but also in their purpose, success factors, and value creation mechanisms. Step 2: Who needs to be part of your ecosystem? What are the players and roles?

The value blueprint also specifies the flow of information, goods or services, and money through the ecosystem. See Exhibit 2. The design of an ecosystem should be driven by its core value proposition. The initial value blueprint should incorporate the minimum number of domains types of participants or market sides that are needed to provide this core value and expand over time. All examples of hybrid models that we know started either as a transaction ecosystem Airbnb, Alibaba, LinkedIn or as a solution ecosystem Apple iOS, Android and added further domains and offerings only once they were firmly established.

The value blueprint is the basis for assigning roles to the various players. In transaction ecosystems, the orchestrator role is played by the owner of a central mostly digital platform that links producers and their suppliers with consumers. The different roles have benefits and drawbacks.

The orchestrator builds the ecosystem, encourages others to join, defines standards and rules, and acts as arbiter in cases of conflict. The broad scope of the role comes with the bulk of responsibility for ecosystem success and the sustained level of investment that is required to get the ecosystem going. The orchestrator is the residual-claim holder of the ecosystem. While it has a big influence on the distribution of the value created, it must also make sure that all relevant players earn a decent profit.

In return, the orchestrator can keep the residual profit, which can be very high Apple iOS, Microsoft Windows but also negative for an extended period of time Uber, Lyft. Orchestrators that fail in their responsibility to secure fair value sharing will sooner or later destroy their ecosystems. Who should be the orchestrator? In many business ecosystems, the assignment of the orchestrator role is clear.

For example, in most transaction ecosystems the provider of the matching platform is the natural orchestrator, and the roles of producers and consumers are readily assigned. Similarly, some solution ecosystems are built on a technical platform that serves as the basis for orchestration, such as the console of a video game ecosystem or the operating system on a PC or smartphone. However, as a new ecosystem emerges, the orchestrator role may be contested.

Think of the competing smart-farming ecosystems that are currently being built by equipment manufacturers John Deere , seed and crop protection providers Bayer-Monsanto , and technology players Alphabet. And who should be the orchestrator of an effective ecosystem for electronic health records: health insurers, providers, IT companies, or the government?

You cannot unilaterally choose to be the orchestrator. You need to be accepted by the other players in the ecosystem. It is important to understand that you cannot unilaterally choose to be the orchestrator. In this regard, there are four requirements for a successful orchestrator of a business ecosystem.

First, the orchestrator needs to be considered an essential member of the ecosystem and control resources needed for its viability, such as a strong brand, customer access, or key skills. Second, the orchestrator should have a central position in the ecosystem network, with strong interdependencies with many other players and a resulting high need and ability for effective coordination. Third, the orchestrator should be perceived as a fair or even neutral partner by the other members, not as a competitive threat.

And finally, the best candidate is likely to be the player with the highest net benefits from the ecosystem and thus a correspondingly high ability to shoulder the large upfront investments. Most companies seem to strive for the orchestrator role because they fear being commoditized, losing direct access to customers, or being exploited by another orchestrator. However, being a supplier or complementor in a business ecosystem can be a very attractive role.

Arguably, the biggest winners of the Californian gold rush in the midth century were the suppliers of pots, pans, and Levi jeans. Similarly, suppliers and complementors can benefit from lower investment requirements and the opportunity to join the most attractive of several ecosystems. Or they can hedge their bets and participate in more than one ecosystem.

In particular, if they provide important components that represent a bottleneck for the ecosystem, they can secure a substantial share of the overall profits. Hannah and K. An example of a highly successful complementor is Adyen, a Dutch payments company enabling global platforms to support all key payment methods around the world. Arithmetic dictates that only a small minority of firms can be orchestrators. We are convinced that many incumbents would be well advised to put their strategic focus on finding attractive complementor or supplier roles.

How can the orchestrator motivate the other players? Ecosystem orchestrators face the additional challenge of motivating the required partners to commit and contribute to the ecosystem. Ron Adner identified two important risks for the feasibility of an emerging ecosystem: co-innovation risk and adoption risk. In the case of a business ecosystem, these individual risks multiply because of the interdependence of the different components.

The probability of technical success of an ecosystem solution equals the mathematical product of the probability of success of all required components, which can be very small if just one factor is small. This co-innovation risk is particularly relevant for solution ecosystems, where the failure of one critical component is sufficient for the entire ecosystem to fail.

For example, in early , Nokia and Sony Ericsson started a race to bring to market the first 3G mobile phone capable of video streaming. Nokia had forecast that by more than million mobile handsets would be connected to the internet. The actual number was 3 million; million was reached in , six years later. Nokia became a victim of co-innovation risk: While Nokia was fast to the market and could sell its first 3G handset in , before Ericsson, other actors in the ecosystem still had to develop solutions to fully enable video streaming, such as formatting software to fit TV images on small phones, router innovations allowing mobile phone operators to know which customer signed up for which plan, and digital rights management to ensure copyright protection for content owners.

Before these innovations were established, 3G video streaming could not be viable, rendering the device largely useless. Assessing co-innovation risk is important to evaluate the overall probability of success of the ecosystem, but also to identify the bottleneck components that need most attention and support. Intel understood this challenge when the company designed its ecosystem and created the Intel Architecture Lab to drive architectural progress on the PC system and to stimulate and facilitate innovation on complementary products.

Even if co-innovation risk seems limited, there is another challenge related to the value blueprint: adoption risk. Because of the high interdependencies in a business ecosystem, all contributors to the overall solution need to be ready, willing, and able to participate and invest in the ecosystem. A single instance of rejection is enough to break the entire adoption chain.

For example, Better Place finally failed in spite of a compelling value proposition because it could not secure the participation of one important group of partners in its ecosystem, the car manufacturers. It got Renault on board by guaranteeing volume and placing an order of , cars, four years before it had a single customer.

Partners are more likely to commit if they score high on the following criteria: High relative profit increase from participation High competitive risk from non-participation Limited investments required for participation Limited risk from participation Existing capabilities to build on If some critical players show a high adoption risk, you may need to reflect this in your ecosystem design with incentives for participation.

Incentives need not be only monetary; they can, for instance, also include access to customers or data. Ron Adner mentions digital cinema projectors as an example. The value proposition for replacing analog films and projectors by digital counterparts was generally compelling: higher resolution, better protection from piracy, and significant savings in the value chain.

Regardless of these advantages, adoption risk proved to be very high for cinemas because the investment costs were prohibitive relative to the benefits. Despite efficiency gains, higher quality for consumers, and more flexibility regarding the offering, cinemas saw no need to adopt digital projectors on a large scale. Step 3: What should be the initial governance model of your ecosystem? How open should the ecosystem be? Ecosystem governance is an important design choice because it creates an indirect form of control appropriate to the complexity and dynamism of an ecosystem.

Governance needs to balance two requirements for ecosystem success: value creation rules of collaboration to co-create value as an ecosystem and value sharing rules and processes for splitting the value among ecosystem players. The single biggest governance question for an emerging ecosystem is its degree of openness. Questions in three areas must be answered: Access.

Which individual partners will be allowed to participate in the ecosystem? Which requirements do they have to fulfill in order to get access to the platform and its resources? To what extent are ecosystem partners invited to shape the ecosystem? What is the scope, detail, and strictness of the rules governing this? Who decides how the value created is distributed among partners? What level of ecosystem-specific investments and co-specialization is required?

Is exclusivity demanded or are partners allowed to multihome in competing ecosystems? In practice, we can observe successful ecosystems with very different levels of openness, from rather restrictive Nespresso to managed video games to very open Airbnb. Alarmed by piracy in the music industry, publishers were extremely concerned to protect their rights around books. Sony did not manage to establish a governance model to address this concern. Therefore, Amazon could conquer the e-book market as a late entrant by establishing the Kindle as a very closed platform that loaded content only from Amazon and precluded users from transferring books to any other device or to a printer.

In some sectors, ecosystems compete on their degree of openness. How can you find the right level of openness for your ecosystem? The decision must optimize the tradeoff between the advantages of a more open setup and of a more closed setup. Open ecosystems can benefit from faster growth, particularly during launch. They enable greater diversity of participants and variety of offerings and encourage decentralized innovation.

Open ecosystems tend to use the market to guide their development; partners join and leave and adjust their offers as customer demand and technologies evolve. On the other hand, open ecosystems are difficult to control and are thus best suited for products and services with limited downside and relatively low cost of failure.

In case of high failure costs, and a corresponding need to limit the downside, a closed ecosystem may be the better solution. It allows for a more deliberate design of the ecosystem and for closer control of partners and of the quality of the offering.

Moreover, a more closed ecosystem helps the orchestrator capture value by, for example, charging for access. The right level of openness for a given ecosystem will depend on the relative importance of the individual factors, such as growth versus quality, decentralized versus coordinated innovation, and speed versus consistency of co-evolution. Competition with other existing or emerging ecosystems in the same sector can also play a role, because a new ecosystem needs to find a differentiated positioning, such as the degree of openness.

We have seen many ecosystems start with a rather closed governance model in order to establish high quality and open up later. By building this dense and exclusive network of experts, Quora was able to develop an inventory of high-quality content that then made it easy to attract a broader audience when the platform later opened up. What should the orchestrator control?

As an orchestrator, you face an additional design question: What do you want to do yourself and what do you want to encourage complementors to do? A starting point may be your own assets and capabilities. Successful orchestrators claim important system control points that allow them to capture their fair share of value.

For example, Nest decided to engage in alarm and monitoring itself because these are essential functionalities for controlling the home. And Google uses its Google Play store to control the otherwise very open Android ecosystem. There are, of course, many other initial governance questions. For example, when designing a transaction ecosystem, the platform orchestrator must decide whether the matching of producers and consumers should be done by algorithm Uber or by users Facebook ; whether pricing should be based on rules and algorithms LendingClub or on offer and negotiation eBay ; and whether curation should be done by platform editors Wikipedia , user feedback Airbnb , or algorithms Google Search.

We will address the question of ecosystem governance in more detail in a future article in this series. Step 4: How can you capture the value of your ecosystem? What should you charge? When the basic setup of the business ecosystem is defined, the next big design step is to find a way to translate the benefits that the ecosystem creates for its customers into value for its participants.

Monetization is one of the biggest challenges of the ecosystem orchestrator, which must balance three competing objectives: maximizing the size of the total pie; enabling all important domains groups of participants of the ecosystem to earn enough profit to ensure their ongoing participation; capturing its own fair share of the value.

To achieve this, the orchestrator must design not only the value proposition for the customer but also the value-sharing model, by defining the value proposition for each group of relevant stakeholders. At the same time, the orchestrator must make sure to own critical control points, such as access to the customer, products with many interfaces, or critical services.

In solution ecosystems, value capture is typically rather straightforward because the solution that the ecosystem creates can be sold as a product or service. The orchestrator can in addition capture value from complementary products or services through access fees, licensing fees, revenue shares, or sales of value-added products or services to complementors.

Transaction ecosystems offer many more options for capturing value. The orchestrator can charge for access, for example, with a general access fee to the platform, an enhanced access fee for producers for better targeted messages or interactions with particularly valuable users, premium access fees for consumers, or enhanced curation fees for users who are willing to pay for guaranteed quality. The orchestrator can also charge for usage in the form of a transaction fee, either a fixed fee per transaction or a percentage of the transaction price.

In addition, the orchestrator can charge for supplementary products or services such as invoicing, payments, insurance , or it can monetize the ecosystem indirectly through advertising revenues. Whom should you charge? The second critical question of value capture is whom to charge. Again, the orchestrator has a number of choices, such as charging all participants, charging only one side of the market while subsidizing the other side, or charging most users the full price while subsidizing selected marquee users or particularly price-sensitive users.

Our analysis showed that mispricing on one side of the platform is a key reason for failure, in particular in the launch phase see the next section. For example, Table8, a platform for last-minute reservations in sold-out restaurants, failed because it charged the wrong side of the market. Competitors like OpenTable that charged restaurants for their reservation service turned out to be more successful. Similarly, eBay had to learn that its established model of charging users to list products and services did not work in China because the practice discouraged sellers to set up online shops, whereas Taobao offered a cost-free system that was financed solely by advertisements.

How can you find the right monetization strategy for a given business ecosystem? In general, monetization should be designed so that it does not stifle the growth of the ecosystem but instead encourages and incentivizes participation and thus fosters network effects. This can be achieved, for example, by charging for transactions rather than access, subsidizing the side of the market that is less willing to participate, or offering rebates for increased usage and rewards for inviting others to join the network.

A good starting point is to identify the participants with the highest willingness to pay and charge them according to the net excess value they derive from the ecosystem. Moreover, monetization should be used to overcome bottlenecks in the ecosystem and to encourage innovation by, for example, subsidizing bottleneck players and offering better terms for new products.

Of course, the pricing strategy of an ecosystem can change over time. Many platforms initially subsidize one or both sides of the market to overcome the chicken-or-egg problem during launch. However, most of them realize that it is difficult to transition from free to fee and that they need to offer new, additional value to justify the change. Step 5: How can you solve the chicken-or-egg problem during launch?

What does it take to achieve critical mass? They do not achieve the critical mass to secure network or data flywheel effects, whereby scale begets further scale. An analysis of 57 ecosystems in 11 sectors across geographic markets by the BCG Henderson Institute found that half of the investigated ecosystems never took off. When we looked deeper into the successes and failures, we noticed many misunderstandings regarding ecosystem launch.

First, despite the paramount importance of network effects in many business ecosystems, first-mover advantages are often overestimated. It is not about being the first in the market, but being first with a complete solution. The Apple iPod was not the first digital music player, but it was the first to offer a comprehensive solution by combining the hardware product with the iTunes music management software. Second, the size of the network should be measured not by vanity metrics, such as the number of members, but by the number of interactions or transactions, which is how business ecosystems create value.

Third, it is not only about the quantity of participants but about the right participants such as the most attractive restaurants for an online booking platform like OpenTable in the right proportions such as a balanced number of drivers and riders for a ride-hailing ecosystem like Uber. Identity and culture are important success factors for a business ecosystem, and it is difficult to change them once they are established.

Ecosystem growth is thus strongly path dependent, and the selection of early members and the sequence of attracting members can have a big impact. An important consideration to increase the odds of a successful launch is to start with a minimum viable ecosystem MVE , a term coined by Ron Adner.

In the traditional approach to launching a new product, the fully developed value proposition of the product is demonstrated in a trial pilot with limited commercial scale before the broad rollout of the product. By contrast, a minimum viable ecosystem initially focuses on a basic value proposition the core transaction but demonstrates its commercial viability at scale, directly establishing a dense network of partners and customers.

Over time, the MVE can expand its value proposition in a series of staged expansions. To quickly get to critical mass and build a dense network, many successful ecosystems we observed initially constrained themselves by geography. For example, Airbnb first focused on New York, and even as the company started its international expansion in , it focused on creating critical mass in just a few markets.

Similarly, OpenTable conquered one city at a time, following the rule of thumb that once 50 to concentrated restaurants in a city subscribed, enough consumers would use the platform.

DARTS BETTING SYSTEMS

Turns out he'd given them a lot of thought already — here's what he said: To date, the electric car has been a poster child for ecosystem mismanagement. But what has been desperately lacking is a strategy for pulling them together on terms that make sense to mainstream buyers.

Better Place breaks the mold in this regard. They are doing something so interesting that I dedicated an entire chapter chapter 7 of my book, The Wide Lens www. The power of the Better Place model is that that they are not trying to innovate the electric car, but rather to innovate the ecosystem around the car. Two broad elements stand out. The high customer satisfaction is a testament to the success of these technologies. Part of the time was spent navigating the institutional hurdles that inevitably accompany every attempt at doing something new zoning rules, insurance.

When Better Place was founded, its strategy called for initial market rollouts in Israel and Denmark. These were inspired choices for a mainstream electric car proposition—countries with small geographies, exceptionally expensive gasoline, and very high purchases taxes on gasoline powered cars—that were ideally suited early markets for the Better Place model to prove its commercial viability. Despite their relatively small populations, the economics in Israel and Denmark were such that even modest market success in just these two markets would have yielded the attractive financial returns critical for investors.

And just as importantly, they would have yielded the meaningful sales volumes critical for retaining and attracting partners, most importantly automakers. Success in these two countries would be the solid cornerstone upon which success elsewhere could be built. The markets in Israel and Denmark would have allowed Better Place to reach a sustainable commercial scale within a manageable geographic scope.

But as excitement around the company grew and scores of government delegations from around the world came to explore what Better Place might do in their own countries and regions, management attention shifted. Yielding to the temptation of fast, global growth, Better Place launched pilots and spent resources across the world from Australia to the Netherlands, Hawaii to Japan, China to California to Canada. Strategy comes down to the allocation of resources, and resources allocated to global expansion are resources not allocated to core markets.

As Better Place pursued new geographies and the clock ticked away, it used up its limited resources—money, management attention, and the most precious commodity of all: the patience of its partners. Pilots are no substitute for sales, especially not in the eyes of long-waiting partners. In early May , Renault announced that it was scaling back its commitment to switchable battery cars and that the long-awaited second model, the Zoe compact, which Better Place had counted on to complement the mid-sized Fluence, would not be coming after all.

This vote of no confidence made it exponentially harder to line up new car manufacturers, without which the company was dead in the water. It is impossible to know if Better Place could have achieved the promise of profitability had it kept an unwavering focus on Denmark and Israel until those markets succeeded. But it is certain that early global expansion was not the route to success. Controlling the urge to grow— securing success in early markets before moving forward to pursue bigger opportunities— requires enormous discipline, especially in the face of enthusiastic supporters.

Confusing enthusiasm for victory is a cardinal management sin. It announced its exit from all non-core markets to focus exclusively on Israel and Denmark. Within months of the decision they had captured 1 percent market share in Israel, an enormous achievement for a company selling a single car model. But by then it was too late. Better Place declared bankruptcy on May 26, The success of electric cars depends not just on the components—cars, batteries, charge spots—but in how they are put together to solve the problems of range, resale value, and grid capacity.

A narrow focus on commercializing the individual pieces without accounting for how they fit together in the bigger picture is a recipe for failure.

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How Established Companies Have an Advantage in Changing Healthcare Trends - Ron Adner, Ph.D.

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