Ecosystem Analysis

This text is based on “The Wide Lens” by Ron Adner. Compiled by Kaushik Shah for MMS-2, JBIMS
10/2/2019.

How can great companies do everything right, identify real customer needs, deliver excellent
innovations, beat their competitors to market and still fail? The sad truth is that many companies focus
too intensely on their own innovations, and then neglect the ecosystems on which their success
depends. In our increasingly interdependent world, winning requires more than just delivering on your
own promises. It means ensuring that a host of partners deliver on their promises, too.

Great execution is critical. It is a necessary condition for success. But it is not enough. While this
execution focus draws attention to unquestionably important parts of a company’s environment—its
management, employees, owners, customers, and competitors—it creates a blind spot that hides key
dependencies that are equally important in determining success and failure.

You must consider three distinct types of risk that arise within ecosystems:

1. Execution risk: The challenges you face in bringing about your innovation to the required
specifications, within the required time.
2. Co-innovation Risk: The extent to which the success of your innovation depends on the
successful commercialization of other innovations.
3. Adoption Chain Risk: The extent to which partners will need to adopt your innovation before
end consumers have a chance to assess the full value proposition.
Dependence is not becoming more visible, but it is becoming more pervasive. What you don’t see can
kill you. Don’t let your blind spot become your downfall.
Co-innovation risk and adoption chain risk lurk in the blind spot of traditional strategy. They remain
dormant as long as your innovations follow established lines. But when you try to break out of the mold
of incremental innovation, ecosystem challenges are likely to arise.

The Plan of the Book:

Collaboration = Dependence

Multiplying the Odds of Success:

Suppose that one of these partners is responsible for a particularly challenging development effort and
that his probability of success is 20 percent? With just one weak link among the four, the joint
probability tumbles to 0.85 x 0.85 x 0.85 x 0.2, or 12 percent.

Is 12 percent a bad number? No. There is no such thing as a bad number. There are only bad
expectations. Twelve percent is fine, as long as you understand the true probability of success and make
your choices based on this knowledge.

The trouble begins when we make a 12 percent bet but think that the odds are 85 percent.

So how do we move forward? Options are:

1. Where can we deploy additional resources? Do we deploy resources to make 85% to 95% or
20% to 30%?
2. Revaluate the vision and divest the weakest link?
 Adoption Chain Risk: Seeing All Your Customers Before Your End Customer
A range of intermediaries stand between you and your end customer: the distributor who needs to
agree to bring your product to market, the retailer who needs to agree to showcase it, and the
salesperson who needs to agree to sell it. Your success depends on each of these partners adopting your
innovation and seeing the value it will create for them. If any one of these partners is not on board, you
will never be able to reach your end customer. When does the best product lose? When the consumer
doesn’t have a chance to choose it.

(Total) Cost vs. (Relative) Benefit:

Innovators and customers view “benefits” and “costs” from very different perspectives. Missing the
difference is a recipe for disaster. Innovators think about benefits in terms of what their product actually
provides: the absolute benefit delivered to the customer. But customers think about benefits in terms of
added value: the relative benefit delivered by the product compared to the available alternatives.

If you are a CIO considering an Office upgrade, your notion of cost goes well beyond price to include
retraining, hardware upgrades, changeover time, and all the unknowns that inevitably come with
making a company-wide change. While the sales rep brags that Office 2007 is 99.9 percent compatible
with 2003, what keeps the customer up at night is that last 0.1 percent.

Many innovations rely on a chain of intermediaries that stand between them and their end customer.
As was the case with co-innovation risk, however, the very act of recognizing the sources of adoption
chain risk can suggest avenues for addressing it. Rather than abandon the effort, the wise innovator will
revisit the plan for innovation A with an eye to eliminating the retailer’s deficit—by finding an
alternative partner, an alternative path, or by reallocating surplus along the chain to put the retailer in
positive surplus

Risk can be managed proactively, but only if it is recognized in advance.

Adoption chain risk is a product of the tug-of-war between innovation and the status quo. The challenge
is convincing critical partners that there is positive value for themselves in joining your efforts when they
feel they are doing just fine as is. Sometimes this is a matter of communication.

You must not avert your gaze when confronted with a partner with negative surplus. The key is to not
rush to action until the fundamental dynamics are clear. It is easy to invest in satisfying end users, but it
is not always effective. Remember which customer in the adoption chain is the most important. All of
them.
 Mapping The Ecosystem
Your value proposition is a promise. It is a vision of the new value that your innovation efforts will
create, as well as who this value will be created for. For effective, efficient innovation, you need a way
to translate the value proposition into action.

We will use a mapping tool called the Value Blueprint . The value blueprint is related to value chains and
supply chains. The main difference is that while the latter tend to focus on the linear sequence of
handoffs from suppliers to producers to distributors to end customers, the value blueprint is explicit
about the specific location and links of complementors that lie off the direct path to market but are
nonetheless critical for success.

The value blueprint is a map that makes your ecosystem and your dependencies explicit.

It lays out the arrangement of the elements that are required to deliver the value proposition—how the
activities are positioned, how they are linked, and which actor is responsible for what.

The steps to construct a value blueprint are:

1. Identify your end customer.

Ask: Who is the final target of the value proposition? Who ultimately needs to adopt our
innovation for us to claim success?
2. Identify your own project.
Ask: What is it that we need to deliver?
3. Identify your suppliers.
Ask: What inputs will we need to build our offer?
4. Identify your intermediaries.
Ask: Who stands between us and the end customer? Who touches our innovation after us, and
to whom do they pass it on the way to the end customer?
5. Identify your complementors.
For each intermediary ask: Does anything else need to happen before this intermediary can
adopt the offer and move it forward to the end customer?
 6. Identify the risks in the ecosystem.
For every element on the map ask:
a. What is the level of co-innovation risk this element presents—how able are they to
undertake the required activity?
b. What is the level of adoption risk this element presents—how willing are they to undertake
the required activity?
7. For every partner whose status is not green, work to understand the cause of the problem and
identify a viable solution.
8. Update the blueprint on a regular basis. Your value blueprint is a live document, and as
conditions change over time, it will need to be modified accordingly.

It is rare for a significant innovation to start life with an all-green-light blueprint. It is also not necessary.
Some yellow lights are acceptable, as long as they are accompanied with a plan to turn them green.
Yellow lights are sign of delays to come, but they need not be showstoppers. Red lights, however, are a
major problem. Any red light that appears on your map, whether because of a partner’s inability to
deliver or unwillingness to co-operate, or due to a problem on your part, must be addressed. This can
mean any number of scenarios, from managing incentives to finding a way to eliminate the troublesome
link in your blueprint. Often, identifying the most promising path is an iterative process. Only once you
have made the necessary adjustments can you confidently start your engines.

This is not to say that seeing all green guarantees success; you will still face all the usual unknowns of
the market and its vagaries. Execution is critical. But unless you have a plan to get to green across the
board, expect delays and disappointment even if you deliver your own part flawlessly.
 First Mover: Advantage or Disadvantage?
When we think about early-mover advantages we tend to think in product terms. The outsize profits of
winning exemplars are held up as proof of the prize that goes to those who “get it right first.” For
example, Xerox in copiers, Intel in microprocessors, Bayer in aspirin, and DuPont in nylon.

Early movers can capture mind share and establish standards when the field is still uncrowded; they can
block followers through patents and preemptive acquisition of scarce resources; they learn from their
production experience, optimizing processes to decrease costs while increasing quality; and they benefit
from switching costs when shifting vendors requires customers to retry and retrain on an innovation.

But because early movers, by definition, pioneer new market space, they are exposed to greater
uncertainties than laggards. There is no prize for those who get it wrong first. While early movers flail
about trying to find the right product architecture to position in the right market segment, it is the
latecomers that reap the benefits of pioneering failures. And so, losing exemplars are held up as proof
that pioneers are the ones with arrows in their backs.

We can better understand the relationship between entry timing and advantage by using the First-
mover Matrix. The debate about first-mover advantage has hinged on the likelihood that the early
mover enters the market with the right product. In our terminology, the focus has been on execution.
And the expected size of the advantage is directly linked to the size of the execution challenge: being
first to market with an easy-to-implement, and hence imitate, product (a new office chair design or a
vitamin-enhanced beverage) will yield a lesser prize than pioneering a harder-to-implement product (a
new engine design or a supercomputer). In a product world, this makes sense.
 The Five Levers of Ecosystem Reconfiguration
Reconfiguring an ecosystem entails changing the pattern of interaction among the elements in the
system. Taking any value blueprint as a starting point and looking at the arrangement of activities,
actors, and links, we can ask five fundamental questions to uncover a new configuration that can
eliminate the problematic bottlenecks:
1. What can be separated?
Is there an opportunity to decouple elements that are currently bun
bundled
dled in a way that can create new
value and move the value proposition forward?
2. What can be combined?
Is there an opportunity to bundle elements that are currently uncoupled in a way that can create new
value and move the value proposition forward?
3. What can be relocated?
Is there an opportunity to shift existing elements to new positions in the ecosystem in a way that can
create new value and move the value proposition forward?
4. What can be added?
Are there elements that are currently absent but whose introduction to the ecosystem can create new
value and move the value proposition forward?
5. What can be subtracted?
Are there existing elements whose elimination from the ecosystem could be accommodated in a way
that would allow for the creation of new value and move the value proposition forward?
 Sequencing Success:
We will consider an alternative pathway to scale. It is defined by three guiding principles for sequencing
the successful construction of ecosystems:

1. Minimum Viable Ecosystem (MVE)—the smallest configuration of elements that can be brought
together and still create unique commercial value.

2. Staged Expansion—the order in which additional elements can be added to the MVE so that
each new element benefits from the system already in place and increases the value creation
potential for the subsequent element to be added.

3. Ecosystem Carryover—the process of leveraging elements that were developed in the

construction of one ecosystem to enable the construction of a second ecosystem.