Ecosystems: Surviving the digital asteroid
Companies will need deep technical fluency to survive in a world increasingly dominated by digital businesses. Punctuated Equilibrium – a theory of evolution – says that there are moments of sudden ecological change when organisms that can adapt quickly take over and dominate new ecological niches.
Insight in brief
- The trend is towards the creation of small digital ecosystems.
- What is special about them is that they have a strong influence on the relationship with the customer and do not respect market boundaries.
- So how should traditional companies react to these future prospects?
Mammals took over from the dinosaurs after an asteroid crash changed the world. We’ve seen this in IT as well. Remember the rise of Intel PCs and Ethernet networking? Neither was the best possible solution, but they filled a need and crowded out technically better alternatives.
Now traditional corporate IT is facing another “asteroid” as major “digital native” companies like Amazon and Tencent break out of their original markets. For years, they’ve been selling a wide range of services: cloud-computing, logistics, consumer electronics, gaming, finance, and more. This trend shows no sign of slowing, and we should expect more disruption, as static sectors are turned on their heads.
As Atluri et al. point out in “Competing in a world of sectors without borders“, these disruptive and innovative companies are using their digital systems and experience to enter and overwhelm new market sectors. For example, Amazon recently bought Whole Foods Market to establish a presence in groceries. They use their ubiquitous online presence and their deep logistics infrastructure, combined with their data analysis, to challenge their established traditional rivals. The whole is very much more than the sum of the parts.
Atluri et al. believe this trend will lead to a small number – about a dozen – of digital ecosystems, such as travel and hospitality, health, and Business to Business (B2B) services. These ecosystems will be characterised by their hold on the relationship with the customer and will not respect traditional market boundaries. Instead, they are open to businesses that provide specialist services and good support for integration. This has profound implications for businesses of any significant size.
Thriving and adapting
Given this future, how can traditional businesses respond? One approach is to become an ecosystem in your own right. This requires extraordinary luck or very deep pockets, and perfect timing. The history of the internet is littered with once-dominant companies, such as AOL, AltaVista, and Yahoo, that didn’t quite make it. For existing companies, an alternative goal might be to create a specialist ecosystem for their area of business. Apart from the technical challenges, this requires careful thinking about how open they’re prepared to be and where they contribute the most value.
The other response is to learn to thrive in these ecosystems and to be able to adapt quickly in a changing world. This allows a business to exploit new opportunities as they arise, survive shifts in the environment, and build symbiotic relationships with other players. Survival also requires a fundamental shift to digital technology. Having the right product organisation is only part of the story, businesses may also need an engineering partner that has the skills and infrastructure both to respond to product demands and to propose innovations.
The insurance industry is one such sector that will need to open itself to change. Consumer need will be the driving force as demand for improved services, quality, flexibility, choice, and innovation challenges the status quo. Insurers will be forced to join the right ecosystems, offering the right products at the right time. They must learn how to change their business models as the value chains change. If these needs are not met promptly, then customers will exercise their new freedoms to go elsewhere, and insurers will not be able to rely on long-term loyalty.
Recombining services to create new ones
Whichever response they take, the biggest change for established organisations is that IT is no longer an internal siloed function, but becomes the fundamental medium for engaging with the world. A company has to “deconstruct” itself so that it can create relationships with new partners to innovate and create new products and services.
A standard example would be customers tracking items they’ve bought. This can include multiple collaborators: a retail site where the customer finds the item, a financial institution to transfer the money, a manufacturer to produce the item, and one or more logistics companies for the delivery. There might also be less visible collaborators such as accounting systems, customer relationship systems, and chat systems for customer support – none of which are hosted by the retail site. And, of course, nothing in this scenario limits which organisation owns the retail site: It could be a bank, a manufacturer, a specialist retailer, or the inevitable Amazon.
Engineering challenges that need to be addressed
To succeed in this new world, there are many engineering challenges that have to be addressed:
- Security: Because the digital offering is the company and customers need to be able to trust it with their critical information. A single corporate security breach can cost far more than savings from deskilling staff.
- Resilience: Because customers need to be able to rely on services. Given that the reliability of a customer application is the product of the reliability of all its supporting services, even low levels of failure can trigger a cascade of problems. There is no “Sunday night shutdown” for international systems.
- Application Programming Interfaces: API is the mechanism by which all the different services communicate – for technical customers; they are the product. For businesses to build new services based on services that they do not control, they need well-defined, stable API that they can rely on.
- Data Analytics: This is the window onto what customers are actually doing. There is just too much raw data, too many transactions and interactions, to make sense of. Good analytic tools can guide business decisions by providing actionable insight.
Keep an eye out for our follow-up posts where we will look at each challenge in detail. One thing that is certain – no business can afford to stand still. Expect disruption. Plan your response and don’t wait for the likes of Amazon to come knocking.