What are the fundamental building blocks of a digital ecosystem?

One of the key ingredients for success among many of today’s most valuable companies is their ability to maintain and orchestrate their position in a digital ecosystem. This differs from most companies emerging from the brick-and-mortar space, which are built around linear value chains and industrial business logic. How should companies approach this crucial transition, what are the key components, and how do you create value from digital ecosystems?

To succeed with digital ecosystems, it is crucial to understand in-depth how digital ecosystem works, as well as how your company could benefit from a digital ecosystem, rather than attempting to replicate tech giants such as Amazon, Apple, Facebook, Tencent, or Bytedance. Although they all share the common characteristic that they have succeeded in capitalizing on their respective digital ecosystems, their implementation is somewhat different.

Instead of replicating these companies, one should look deeper to identify what are the key characteristics and components that are present across various ecosystem strategies. Based on the desired position in the customer value chain, companies need to assess their fit within specific ecosystems, as well as their ability to create value based on that position.

Few organizations have the capacity to establish and maintain ecosystems at the same scale as Apple or Amazon. However, as digital ecosystems become an integral part of the digital economy, then every organization should know how they operate, to at least be able to participate in the ecosystems that exist.

Case in point is Too Good To Go, and their niche ecosystem. By connecting local businesses and consumers to make unsold food available at reduced prices to cut food waste. In addition to establishing their own local ecosystem of vendors and consumers, Too Good To Go is also part of both the iOS and Android ecosystems.

While it is sometimes dangerous to go alone, a digital ecosystem is depending on collaboration to create value. A winning ecosystem must be able to manage a multitude of partnerships across various industries, and often across borders and types of relationships. Managing the right mix of collaborations is critical for success as an ecosystem is more than a set of partnerships. Since it is a network of loose contributors who interact closely to create mutual value, there is necessarily an atmosphere of interdependency among partners in the ecosystem. This means that all partners share the same interest and that individual partners will only be successful if the ecosystem succeeds. Needless to say, you should have a clear monetization strategy from day one. How should you and every single partner in the ecosystem benefit from participating in the ecosystem?

No matter the strategy you choose to pursue, a digital ecosystem is dependent on an active and attractive user base. To increase engagement and “stickiness”, users should ideally be able to participate as contributors and creators. For platforms where user-generated content is crucial to maintain an active user base, you should treat every user as a potential strategic partner and allow them to monetize their content. On TikTok, influencers can monetize their views through the app’s Creator’s Fund, and Facebook recently announced that they follow up and make it possible for users to monetize their content on the platform.      

The cornerstone of every single digital ecosystem is an API-enabled digital platform that allows your company to collaborate efficiently through digital channels both internally as well as with external third parties. The fundamental characteristics of the platform are based on a service-oriented IT-architecture.

The basic definition of such architecture is a software design approach where specific functions are represented by autonomous services. A common approach to defining services on a service platform is to decompose larger processes into units of software where those are separately deployed and may operate autonomously from adjacent services. One of the crucial benefits of this autonomy is the ability to deploy, update and roll back single services with little to no impact on the remaining infrastructure and/or adjacent services.

The major distinction between a service platform as the foundation for a digital ecosystem as opposed to a traditional service-oriented architecture is the transition from a modular to a composable architecture. While a modular architecture is intended to be assembled in one specific order, a service platform built upon the principle of composability allows for greater flexibility and re-usage of digital services on the platform.

Digital identities often act as the next cornerstone of a modern approach to digital ecosystems. Digital identity should include both secure authentication as well as profile data to enable personalization. The service platform should act as a single source of truth regarding customer authentication and preferences. The enables companies to have one representation of the customer across channels, both internal as well as external channels. Knowing who the users are, enables personalized content, as well as reduced friction when transacting on the platform.

Payments are becoming a natural service to include in a digital ecosystem as this is tightly connected to customer ID and secure authentication. Adding seamless payment options across channels reduces friction for the end-user and enables “one-click buy” opportunities when the customer is authenticated.  

In a world of digital ecosystems, data is the raw material that fuels the digital economy. In order to be a part of this value creation, there is a need to have a clear data strategy. In order to lay down the groundwork, you should map your existing data sources and have a well-thought-out plan on how to collect, update and store your data. When do you need real-time data, and when is it good enough with a good old-fashioned overnight batch? The freshness of the data should also govern your overall principles of data storage and accessibility. Make sure you make sufficient use of your existing data before starting to collect external data. The more data you have, the bigger the complexity.

In terms of make vs. buy, a rule of thumb should be that you spend at least three-quarters of your platform budget on either procuring off-the-shelf services, utilizing services already in place on your cloud platform of choice, or integrating open-source components. My belief is that the less you develop yourself, the greater your capacity to innovate will be. Let me explain why. Every single line of software code you write will over time become part of your legacy technology, and over time, tech talent will be forced to maintain legacy code rather than participating in developing new services. By relying on SaaS components and managed services, you will free up valuable time that would have been used on application management if you were to develop everything yourselves.

The digital platform act as a gateway to a broader digital ecosystem and must be able to co-exist with underlying systems that handle standardized processes and core functionality. The primary role of underlying core systems should be to provide scale and cost-efficiency, while the digital platform should be utilized to provide flexibility, connectivity, and rapid time to market for new digital services and partners.

However, one common bottleneck when attempting to integrate legacy systems to your digital platform is their inability to scale. If your underlying infrastructure is built for batch operations, failure is almost certain. Regardless of which ecosystem position you wish to pursue; your platform must be able to operate at scale. What is the number of frequent users you need to support? How many transactions will be performed per second? These are some key questions to start with.

Succeeding in a world of digital ecosystems is no walk in the park, and it is imperative to have a long-term strategy as well as the fundamental building blocks to execute your strategy.  Organizations must discover their own position, and make sure they are able to provide enough value to all participants in the ecosystem to ensure its longevity.