What possibilities will you unleash by mastering an ecosystem strategy?

CEOs often find themselves at the crossroads when considering an ecosystem strategy to accelerate innovation and growth.

Customer behaviors are changing and adapting at a more frequent pace, technology is becoming increasingly disruptive across all areas of the economy, sector boundaries are blurring further. To retain market leadership, companies must constantly evolve in alignment with the changing industry and digital landscapes, as well as customer preferences.

Challenged with ever-changing technology and time constraints, CEOs often find themselves at the crossroads of the build, buy or partner conundrum to accelerate innovation. In response, a growing number of CEOs are embracing ecosystem business models – and with good reason.

Our study of more than 800 business leaders leveraging at least one ecosystem business model has revealed that ecosystems make up on average 13.7% of their total annual revenues, drive 12.9% in cost reduction and generate 13.3% in incremental earnings. Furthermore, they offer organizations clear benefits, such as greater access to technical capabilities, talent and assets.

Despite these clear benefits, ecosystem business models are contractually, logistically, and commercially complex, with structures that are often unclear to new participants. These challenges are compounded by the fact that CEOs are often uncomfortable being in a partnership arrangement where they can’t be in the “driver’s seat”. 

Ecosystems come in many flavors

For firms looking to access new growth opportunities via an ecosystem approach (as opposed to building it themselves or buying a company), this means identifying the “right” ecosystem, with the right arrangements and the right participants for the business goals they are trying to achieve. We see seven variants of an ecosystem model currently being successfully applied by firms, each with a different underlying rationale. This can range from orchestrated marketplaces (e.g., Amazon, Apple, Google), to set-ups allowing competitors with differing footprints to join forces (e.g., airline loyalty alliances), to value chain integration (e.g., Insurwave, a blockchain-based shipping insurance ecosystem orchestrated by EY).

Ecosystem adoption varies by sector

According to an analysis of alliance ecosystems of the S&P Global 1200, nearly one-third of these companies (30%) have not entered a single ecosystem since January 2018, highlighting reluctance of many leading global organizations in leveraging ecosystems.¹ However, the comfort with using ecosystems varies by sectors. Technology, life sciences and telecom and mining & metals firms are leading the tables around the use of alliance networks.

For the technology industry, partnerships and ecosystems have become an integral part of its DNA. They were the early adopters of ecosystem model, and the model fits well with the nature of this industry, which has many moving parts, driven by rapid technological advances.

For the life sciences industry, the perception of working together in an ecosystem became more relevant during COVID, as many leading players were running against the clock to develop vaccines.  Since the beginning of 2020, major bio-pharmas have deployed roughly 1.5-times more Firepower on alliances relative to M&A, according to 2022 EY M&A Firepower report (Firepower is a composite metric measuring the strength of a balance sheet for dealmaking, including both cash and equivalents and market capitalization). The average ROI from alliances has been almost 33% higher than M&A. 

For the mining and metals industry, the need for participation in ecosystems is being driven by technology intervention accelerated by the Industrial Revolution 4.0. Due to limited in-house tech expertise, they are entering ecosystems. Other alliances have been established around rare metals and other scarce materials to ensure continuous supply.

In contrast, among the top consumer firms in the S&P Global 1200 list, almost 40% of them have not entered into any alliances since January 2018. This hesitation may be driven by concerns around losing control of their proprietary data, as well as a continued reliance on the traditional value chain structure going from consumer products firm (sometimes via wholesale) to the retailer. But if lessons are to be learned from history, the online shopping model totally disrupted the way the retail industry used to function. According to the EY Future Consumer Index, in 2017, e-commerce had a 10% share of retail, which has since doubled. Letting go of their inhibitions, some of the leading retailers willingly participated in tech ecosystems (marketplace ecosystem business model) led by behemoths of the world, moving from linear value chains to value networks.

Overcoming barriers to an ecosystem mindset

Often, despite the intent, organizations struggle to understand how to leverage ecosystems to drive growth. It stems from a narrow understanding of what an ecosystem “should look like”, based on pre-existing industry norms. The “obvious” options have already been tested and the most promising variants have been found and implemented.

However, to stay ahead of the innovation curve, firms will need to look at options which have not been explored. Companies need to think bigger and bolder, looking at all (seven) ecosystem models, not just the one or two approaches they are most familiar with. Each organization needs to investigate which one is best suited, based on the desired business outcome.

For example, in the branding-focused Fast-Moving Consumer Goods (FMCG) space, a (“co-branding focused”) cooperatative business model might be a more obvious form of ecosystem for firms to explore, such as the co-branding between Febreze (P&G) and Glad (Clorox) on trash bags. P&G’s accretive business model alliance with EY is a very different proposition. Through its decades-long continuous journey of purposeful improvements, P&G created an IP around bringing effectiveness in manufacturing productivity (enabling 85% OEE or better, compared to 60% many manufacturers achieve). The IP was used to build software to help other companies begin their own transformation and innovation journeys to higher overall equipment effectiveness (OEE), zero-touch manufacturing and hyper-efficient supply network operations. In this model, EY was  the channel to market and P&G acted as the subject matter advisor. Both participants in this model realized ecosystem value to provide an enhanced proposition for clients that want to transform their manufacturing and supply chain operations.

In addition, organizations need to shift focus to concentrate on the logic and governance of the ecosystem they are orchestrating or participating in, instead of just thinking about finding the “right partner.” Drawing parallels, whether it is in football or cricket, what you need is not necessarily the best 11 players, but a team that works well together according to a defined game plan towards a common goal.

Taking the sporting metaphor further, most teams require a captain or playmaker – what we in ecosystems would call an orchestrator. The rest of the team also plays vital roles, but they adhere to the common standards defined by the orchestrator. This can make sense for firms where they are accessing new areas of growth where their capabilities are somewhat niche, but critically important, or where they and their competitors are both aiming to orchestrate ecosystems, but clients are keen on avoiding overreliance on a single supplier.

Again, coming back to our initial question that the CEOs need to revert to is, “Even if I can’t drive it, am I willing to take a back seat, to gain access to the growth I can see in this new opportunity?”

Implications and next steps

• Take a conscious look at the alliances and partnerships you and your competitors are a part of. Ask yourself if you are just sticking to the standard in your industry, or if you have explored the art of the possible in the ecosystem universe.
• Ask yourself, “Am I just taking smaller, comfortable steps that are close to my core business or am I ready to take the leap of faith for broader growth opportunities?” When thinking about growth strategy, expand your horizons. Rethink how you have been considering your strategy and the need to pivot.
• Revisit growth priorities previously discarded. Were they set aside because they couldn’t be unlocked with your current value chain structure? Can a suitable ecosystem change that?
• Learn to let go! Embrace the opportunity to enter attractive new growth vectors where, by yourself, you might not be best placed to lead the charge, but you can still make a valuable contribution to a broader value proposition.

Additional EY-Parthenon contributors to this article include Andrew Hearn and Prachi Gupta.

This EY-Parthenon article is part of a sponsored content series as seen on hbr.org.