Ecosystem: A Concept Is Taking Root

Here, under a dome in the Botanical Garden of the University of Zurich, we can get a sense of the ecosystem of tropical drylands. But the term “ecosystem” is also taking root outside of flora and fauna, isn’t it?

Bernhard Lingens The term, originating from the field of biology, has indeed found its way also into the business world. It has become something of a trend. One study, for example, came to the discovery that the term “ecosystem” occurs in large-cap US companies’ annual reports 13 times more frequently today than it did a decade ago. This also owes to the fact that companies like to adorn themselves with the term in an eagerness to appear innovative. Conveniently, the term “ecosystem” is very versatile. The buzzword seems to be a catchall for almost anything.

“Seems” to be a catchall? It sounds as though the term also gets used incorrectly.

Lisa Yerebakan Perhaps this would be a good moment to define the term. There is not just one ecosystem. We frequently use the term, for instance, as a synonym for a business sector – an industry ecosystem, so to speak. Or we can talk about a knowledge ecosystem when it’s primarily a matter of exchanging information. Amazon and other similar marketplaces can be designated platform ecosystems, where network effects and a large number of partners stand in the foreground. These partners are interchangeable at any time.

The situation is quite different in a business ecosystem, where just a few partners join forces to leverage their respective strengths and are difficult to substitute. “Business ecosystem” is thus the appropriate term to use in connection with strategic management and business models.

Lingens Your important and spot-on interjection allows me to return to the initial question. A real economic challenge is the driver behind the buzzword “ecosystem”. And business ecosystems, to adopt the expression, have become a practicable option particularly for stagnating or intensely competitive industries.

Yerebakan Furthermore, digitalization facilitates business ecosystems because it lowers transaction costs. Standardized interfaces of the kind that SIX will provide with its platform for open banking will also reduce collaboration and innovation costs in the future for startups, banks and other partners. Technology makes coordination easier.

Lingens And there’s scientific evidence that substantiates this. Use of the term “ecosystem” turn of the millennium hand in hand with the advancement of digitalization. But there are two other factors besides technology that are also fueling the trend.

The first one has to do with the market. Alongside the urge – or compulsion – for companies to differentiate themselves, consumers are demanding a new way of thinking. They increasingly want a user experience similar to what they get from an online travel agency, for example, even for complex procedures like buying a house.

That leads directly to the third factor: Companies in industries that traditionally have little to do with technology – I include the financial sector in this group – lack the requisite in-house expertise and resources. Even if a concept for a service of that kind was ripened in an innovation process, sooner or later it got relegated to a drawer. The drawer reopens, though, in a business ecosystem.

Yerebakan And ironically, that happens not because a company strays from its core competencies, but because it can even better concentrate on them. At SDX, the digital exchange operated by SIX, we can leverage our status as a regulated securities exchange while at the same time exploring distributed ledger technology possibilities with partners.

By the way, I share the view that the financial industry needs to catch up technologically, which is also the explanation behind the large number of FinTech startups. But the financial industry benefits from having a kind of natural affinity toward ecosystems. The financial sector has always functioned like a network. Just think of the process that ensues when I use an automated teller machine at Bank A to withdraw money from my account at Bank B.

Lingens Good point. We can see that also with the Swiss mobile payment app TWINT. From a purely doctrinal perspective, this network would be too big to function as a business ecosystem. But since the partners – Swiss banks and SIX – were already networked with each other prior to the advent of TWINT, the coordination between them nevertheless works.

How big, then, can a business ecosystem be?

Lingens As small as possible and as large as necessary. During the setup stage of a business ecosystem, having too many partners is an impediment – and a cost factor. For the involvement of four to five partners, for instance, the orchestrator of the ecosystem has to calculate in two to three full-time job equivalents for the coordination.

The orchestrator?

Yerebakan Coordination between the partners in a business ecosystem has already come up a few times in our conversation. The orchestrator is the central partner that handles the coordination work. The other partners chip in products or services that drive a joint value proposition, which is the most important element and the starting point of a business ecosystem. As the orchestrator, I have to ask myself what missing elements I need to obtain to fulfill the value proposition. That question guides my search for partners.

Suppliers also provide companies with missing elements.

Yerebakan But that’s a traditional supply chain. If I, as a company, am no longer satisfied with Supplier A today, I switch to Supplier B. Both supply more or less the same product. In a business ecosystem, in contrast, the crucial aspect is that the products that the partners develop aren’t generic. Each element in itself should represent an innovation. Only that way do business ecosystems create added value and maximize their growth potential. And growth ultimately is the motive for establishing a business ecosystem.

Lingens Organization theory tells us that we save transaction costs when we manufacture in-house or design simple supply chains. For business ecosystems, this means that the generated added value must exceed the additional transaction costs caused by the coordination expenditure. Whether it does in the end largely depends on customers’ willingness to pay. That’s why business ecosystems do not prove successful in all industries. For example, the food and beverage industry, with its low profit margins, will probably find it difficult to break away from the supply chain. A cup of coffee, after all, is a cup of coffee. Customers won’t be willing to pay considerably more for it.

But every company has to come up with its own way of pursuing innovation to fulfill its value proposition. This can also mean acquiring another company or setting up a new division instead of an ecosystem.mpetitive countries on the planet, as the World Economic Forum’s Global Competitiveness Report attests year after year.

SDX, the electronic invoice eBill, TWINT, and the platform for open banking – SIX, at least, appears to be taking a liking to the concept of the business ecosystem.

Yerebakan Yes, and that also has to do with the fact that SIX is ideally qualified to take over the role of ecosystem orchestrator. As the infrastructure operator for Switzerland’s financial center, SIX takes a neutral position. Through its shareholders, the Swiss banks, and through its existing client relationships, SIX already has a strong network in place. SIX also has the requisite level of technical expertise and many years of experience dealing with complex ecosystems like the Swiss payment transactions system.

For my master’s thesis, I’m investigating what skills an orchestrator needs to possess to successfully set up a business ecosystem. With its Innovation & Digital business unit, SIX is optimally positioned organizationally to sensibly interlink a variety of different partners. On top of that there’s the company’s engagement in the F10 FinTech Incubator & Accelerator and in SIX FinTech Ventures, our corporate venture capital fund. Both vehicles enable SIX to maintain very close contacts and a lively dialogue with startups across industry boundaries. This can be of great value particularly in the partner-search stage.

Lingens The value of this, in fact, can’t be overstated. Anyone who is unable to draw on such a network during the stage of setting up a business ecosystem will probably encounter failure unless they have the possibility to call in a co-orchestrator for support.

After the setup stage, a different set of skills is required: managerial skills. On the one hand, it’s about lowering transaction costs, for example by establishing a technical platform; on the other, it’s about satisfying the partners, because as an orchestrator you depend on them.

Yerebakan Pleasing all the partners isn’t all that easy when each one wants something different. It takes a bond of trust and, by extension, employees on the orchestrator’s side who possess social skills and are adept at integral thinking. The demands placed on employees increase further if the orchestrator itself furnishes technical elements as well. Not every tech-savvy specialist is also good at coordinating.

Lingens Sometimes, though, one even has to separate from partners, most certainly when the value proposition is at risk. Conversely, taking new partners on board usually doesn’t make sense until a platform is up and running and is capable of integrating them via standardized interfaces. From that moment on, the ecosystem scales up without causing any additional transaction costs.

Yerebakan What I, as an orchestrator, can also do is to extend the value proposition by adding additional services, though that requires me to re-convince all of the partners of the altered version of it.