Digital ecosystems: A frontier for digital competition

Akhil Hemrajani

After more than a year of COVID-19 impacting the global economy, organizations around the world are still struggling to pivot to a more sustainable digital strategy. A central theme for this objective is the ecosystem play, which maps out how a platform can help acquire new customers more efficiently whilst enabling and incentivizing them to continue transacting within said platform.

Organizations are quickly realizing that it is not enough to onboard a new customer — they also need to consider how to organically encourage consistent transactional behavior from the customers to build ongoing dependency on the organization and its system. This can help protect organizations from losing their customer base to competitors. Hence, it is imperative to adopt an ecosystem strategy to increase the “stickiness” of customers to a platform.

There are three kinds of ecosystems for companies to consider.

Closed loop. A closed loop ecosystem only allows an organization and its affiliates to participate in the offering of products and services to its customer base. This kind of ecosystem is usually in response to a fierce competitive landscape.

Open loop. An open loop ecosystem enables a company to increasingly collaborate with not only its partners, but also other competitors in the space. The motivation behind a company’s interest in maintaining an open platform is so that it can still participate in transactions that it typically would not have engaged in through platform fees and other payments.

Hybrid. A hybrid ecosystem takes components of both previous types of ecosystems, allowing most players in the space to participate and the organization to have an “unfair advantage” over certain product and service offerings.

An increasing number of organizations are competing in the digital sphere. They face an inherent question — do they build features and products themselves or do they partner with other companies to maximize their online presence? Each option comes with its own set of advantages and disadvantages.

Building a new platform could prove to be capital intensive, yet this would enable an organization to capture end-to-end customer value. On the other hand, embedding the products and services of other companies into the ecosystem through a purely partnership model helps the organization be more flexible with its resources. This model means, though, that the organization will need to forego a certain amount of revenue in the form of commissions or fees. Certain organizations have also adopted a hybrid model where they build certain verticals (or customer niches) themselves and then partner up with others to fill the gaps.

For example, some local delivery service providers do this effectively by creating their own grocery marketplaces and onboarding other vendors, thereby creating a balance of competition and collaboration within their respective platforms.

Ecosystems are primarily established in order to efficiently cater to as many customer demands as possible. This incentivizes organizations to focus on the digital delivery of not only products and services, but also a robust customer experience journey. Consequently, this enables organizations to either consolidate their market leadership positions or help the chasing pack make inroads to narrow the gap to the prevailing incumbent. For example, startups such as Grab and Uber originally started operating only in the ride sharing space, but then established other verticals such as food delivery to capture a larger piece of the digital services pie. In the B2B segment, banks are expanding their digital presence by moving beyond simply lending to providing enablement services to small and medium enterprises. By helping these enterprises scale their businesses, banks create additional demand for the banks’ loan products.

As more organizations look to create digital ecosystems, they face an important challenge: how to capture maximum value and how to go about providing a robust customer journey. Digital ecosystems are great tools to increase customer value, but they are at times done at the cost of customer experience. The challenge for any organization looking to establish or further its digital ecosystem play would be to strike a balance between sustainably providing an array of products and services on its platform while making it easy for its customer base to use. An additional layer of gamifying certain tasks to provide additional rewards can also increase the level of complexity of the ecosystem. Providing such features and maintaining a clean and precise user interface can prove to be critical, especially in hyper competitive sectors such as e-commerce and finance. To make customers “stick” to a platform, it is imperative that the platform be both simplistic and engaging — a challenging, but not impossible, task for any platform owner.

During the pandemic, the desire and need for a robust digital ecosystem has increased at an accelerated rate. As platform owners enter new verticals, the propensity of competition with incumbents increases. The ever-changing competitive landscape among various platforms will prove to be an interesting watch. Only time will tell who will come out on top.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Akhil Hemrajani is a Consulting Senior Director of SGV & Co.

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