The concept of digital ecosystems enabled by information technology (IT) is all the rage these days. Yet, the notion of doing business electronically across industry boundaries is certainly not new. In fact, as early as 1966, Felix Kaufman’s article “Data Systems that Cross Company Boundaries” in the Harvard Business Review urged executives to think beyond their own organizational boundaries and consider the possibilities of using IT to do business electronically. Even though the computer industry was in its infancy at the time, this vision was already being realized. An entrepreneurial sales manager at American Hospital Supply, for instance, had created a system that allowed his company to exchange order processing information with customers across telephone lines and enterprising managers at American Airlines were offering large travel agencies computerized reservation terminals to simplify the airline reservation process for key accounts. Indeed, from these entrepreneurial actions grew two legendary digital ecosystems that changed the basis of competition in their respective industries.
With few exceptions, history has shown that competitive advantage and power flowed to the firms that built and owned the technology platform and the business infrastructure that enabled firms to do business electronically at least until the technology became commoditized or governments stepped in to break up monopolies. Why? The proprietary nature of technology, the high cost of entry, and the hard-wired nature of automated processes maintained the hierarchical structure and silos of industry value chains.
Enter the Internet in the mid-1990s with its open industry standards, ubiquitous reach, and flexible, modular processes. The opportunities seemed endless. During the dot-com era, companies spoke grandly of global, non-proprietary Internet ecosystems where companies would band together with others in and even across industries to extend and consolidate their purchasing power. Indeed, at the peak of the hype in 2000, over 100 electronic marketplaces had been launched in the healthcare industry alone.
Though many of these Internet ventures attracted significant capital while it was plentiful, the inability to establish a value proposition compelling for ALL members and a business model that would generate increasing returns to investors caused many of these grand visions to fail. What can we learn from the past that helps us understand how to build successful digital ecosystems today?
Build on internal capabilities. Successful digital ecosystems build linkages to customers, suppliers, and partners as extensions of IT platforms and business processes that are used to coordinate and manage activities inside their companies. If you can’t manage it inside, don’t think you can manage it for those you do business with on the outside.
Exploit the economic value of digitization. While physical assets often lose value with use, the value of digital assets increases. Emerging open standard, on demand IT architectures and business models ensure that ALL members of a digital ecosystem can create, share, and exploit the full economic value of digital assets.
Create a winning value proposition for all. Coercion and abuse of power may hold customers, suppliers, and partners hostage for a time but they will be looking for an opportunity to switch. Trust that each member will receive benefits that exceed what they contribute is central to doing business electronically whether you are selling books to consumers or collaborating to build the most sophisticated airplane.
Penetrate quickly and leverage capabilities. Extended enterprises and networks create value by allowing all members to focus on what they do best, while also contributing to the good of the whole. Social capital increases with the size of the network and the efficiency and effectiveness with which members transact business, share information, and make decisions that create value for individuals and the community. And, as social capital increases, so too does economic value for all.
By: LyndaApplegate
Lynda M. Applegate is the Martin Marshall Professor of Business Administration. Head of the Entrepreneurial Management Unit; member of the General Management Unit; and faculty chair of four Harvard Business School Executive Education programs.
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