Knowing the risks: Ecosystems and the new competition

"Go for it! Swap shares with Sam Bankman-Fried! Do whatever he wants to do! What could possibly go wrong?" admits Michael Lewis in the preface of his book Going Infinite. The risk from that statement is obvious. However, there is a new competitive risk that is much harder to see coming—the threats from the new ecosystem economy.

Borders between the traditional sectors of our economy are fading away. Instead of real estate, technology, financial services, or healthcare industries standing alone, new organizational structures are forming in their place [Alturi and Dietz 2023]. The result is one of the most significant market upheavals in economic history. A shift so revolutionary that it forces organizations to reorganize and collaborate with others to create value beyond what any single company could provide.

These alliances are about collectively creating and sharing value in the best interest of the customer—a supermarket approach to business where everything needed is under one roof [Alturi and Dietz 2023]. In the past, dry goods sold grains, a milkman sold milk, meat came from the butcher shop, and produce was bought from the greengrocer. By combining everything into a single shopping experience, the one-stop appeal of the supermarket overwhelmed the competition.

The ecosystem approach

An ecosystem is created when an organization makes, partners with, merges, or buys another company in a separate but complementary industry. For example, Apple goes beyond computers and even electronics. Today, the company offers credit cards, operates the App Store, and sells digital storage. Amazon, in turn, provides computing resources, runs a grocery store, and owns a movie studio. Microsoft has a stake in media, manufactures electronics, and runs branded retail stores. Even Google goes beyond search with phones, computing resources, and software as a service (SaaS) offerings for business.

Most of today's ecosystem champions began expanding into the digital world [Alturi and Dietz 2023]. Apple partnered with Goldman Sachs to provide credit cards to their 1.46 billion phone customers [Shewale 2023]. Soon after, the partnership launched a savings account with a high-yield APY of 4.15%, ten times the national average. Google did something similar with internet service at 1GB speeds when competitors could barely provide half of that.

As sectors erode, the new competitive attacks will come from multiple angles. It requires new strategies to account for unexpected competitors from different industries [Alturi and Dietz 2023].

Moving from sectors

The silos of sectors have been in place since the second industrial revolution [Dalio 2021] and have shaped our thinking to the point where the new ecosystem-based economy is difficult to imagine. We see the shift in Apple when it changed its name from Apple Computers in 2007. The same year, the iPhone was released. However, the old winners in the phone industry, such as Nokia and Blackberry, never saw the shift forming.

To move from sector to ecosystem, an organization must tear down the walls of its industry box. For example, when Amazon launched in 1995 as the world's largest bookstore, its mission was, and remains, "to be Earth's most customer-centric company." This was ecosystem thinking from the very beginning. Instead of limiting itself to books, it had plans to move beyond from the start.

Conglomerates

In the 1960s, conglomerates started to form. These are large parent companies that expand, acquire, or extend into multiple companies in unrelated industries to diversify their risk [Chen 2023]. Unlike an ecosystem, a conglomerate does not strategize as a whole or combine products from diverse industries.

Conglomerates often suffer from a phenomenon known as the conglomerate discount, which reveals that the value of a conglomerate's stock is 13% to 15% less than the value of its holding [Chen 2023]. For example, when the newly appointed chairman of Chrysler, Lee Iacocca, took over, he sold the tank division to General Dynamics Corporation for $348.5 million [Holysha 1982]. Analysts such as Harvey Heinbach of Merrill Lynch knocked the deal as a last-ditch effort of survival.

However, what Iacocca did was nearly double Chrysler's cash reserves while removing itself from the conglomerate discount. In the years to follow, the company pioneered the minivan and purchased American Motors Corp with its iconic Jeep brand.

Thinking in ecosystems

An ecosystem may share aspects of conglomerates with centralized management and separate companies providing products and services. However, the ecosystem approach combines products and services into customer-centric bundles. Iacocca's simplification of Chrysler worked because customers did not want a tank and car bundle. In contrast, he never tried to sell the finance company that offered credit for car loans.

Amazon, Meta, and Alphabet could be considered conglomerates. However, they do not fit the traditional model of diverse, independently operating acquired companies [Chen 2023]. The core difference begins with the mission statement. For example, Alphabet's mission is "to organize the world's information and make it universally accessible and useful." A much broader mission than search or advertising sales.

Apple's mission is "bringing the best user experience to customers through innovative hardware, software, and services." This goes beyond computers to improving customer experiences outside of any specific industry. The latest is credit cards, but it could quickly become insurance, cars, or search - anything that has a customer experience. 

Adapt or Die

"In my life as a soldier and citizen, I have seen time and time again that inaction has dire consequences," writes General Stanley McChrystal in his book Risk - A User's Guide. As the global business landscape transforms from sectors to ecosystems, the businesses that do nothing will quickly vanish. Those that adopt ecosystem thinking will take market share from diverse industries.

References:

• Atluri, V. And Dietz, M. (2023) The Ecosystem Economy - How To Lead In the New Age Of Sectors Without Borders. Wiley

• Chen, J. (2023) Conglomerate: Definition, Meaning, Creation, and Examples. Investopedia. https://www.investopedia.com/terms/c/conglomerate.asp

• Dalio, R. (2021) Principles for Dealing with The Changing World Order. Avid Reader Press

• Holysha, J. (1982) GENERAL DYNAMICS BUYS CHRYSLER TANK DIVISION. The New York Times. https://www.nytimes.com/1982/02/20/business/general-dynamics-buys-chrysler-tank-division.html

• Lewis, M. (2023) Going Infinite. W.W. Norton & Company.

• McChrystal, S., & Butrico, A. (2021) Risk - A User's Guide. Penguin Random House

• Shewale, R. (2023) 32 iPhone User Statistics: Sales, Usage & Revenue. DemandSage. https://www.demandsage.com/iphone-user-statistics/