Business Ecosystem: Creating an Economic Moat

Business ecosystem is an important concept in marketing strategy.

Why?

Being part of an ecosystem boosts both innovation and growth.

(1) It opens many doors for innovation by preventing from having to reinvent the wheel.
(2) It’s a springboard for reaching new audiences.

Building a Business Ecosystems as Competitive Advantages

Leading an ecosystem is the dominant form of competitive advantage in high-tech. It helps tech companies create what Warren Buffett calls an ‘economic moat‘.

I love Buffett’s medieval metaphor.

What does it mean?

An economic moat refers to the ability to create and maintain competitive advantages in order to protect market share and, above all, long-term profits.

Could you think of any company that has created an economic moat by leading a strong business ecosystem?

Come on. That’s an easy one.

Think of Apple and the App Store, Google and Google Maps API, Salesforce and its Marketplace…

Apple's Business Ecosystem presented in Time Magazine

Apple’s Business Ecosystem presented in Time Magazine

 

So What Does Business Ecosystem Mean?

Let me now explain what business ecosystem means.

The term business ecosystem was popularized by James F. More in an HBR article, Predators and Prey: A New Ecology of Competition.

Business Ecosystem: A term drawn from the study of biology and social systems

Business Ecosystem: A term drawn from the study of biology and social systems

Unlike most authors who use sport metaphors, Moore approached business from a biological perspective. That’s how he came up with the strong analogy of ecosystem.

Businesses, especially in tech, are not hermit. They do not stand alone.

Like any biological system, they co-evolve. Here is how Moore describes a business ecosystem:

“In a business ecosystem, companies co-evolve capabilities around a new innovation: they work cooperatively and competitively to support new products, satisfy customer needs, and eventually incorporate the next round of innovations.”

Building an Ecosystem Through an API

In a business ecosystem, companies are interdependent. They develop new products by sharing technological advances. Or they benefit from each other audiences.

That’s very often a win-win situation.

It’s the principle behind an API or Application Programming Interface.

An API is interface between two pieces of software. It makes software development easier by allowing developers to access the functionality of other software modules.

We find the same elements in an ‘API relationship’ than in any other ecosystem:

  • For the innovator, the API allows more innovation with the integration of advanced functionality and features.
  • The API provider benefits from a powerful marketing tool. The API helps reach new audiences and build brand loyalty by providing innovative use cases.
  • The end users can enjoy a better user experience and more interactive tools.

 

An Example of Business Ecosystem: How Uber and Google Share the Same Fate

Uber—the innovator—has benefited from using the Google Maps API. Uber did not have to develop an online map. It could instantly integrate Google Maps in its app.

The interdependence between Uber and Google has grown. It goes even further than a mere API relationship.

When you search for a location in your Google Maps app, Uber is here as an option along with other kinds of public transport. That allows Uber to reach a larger audience. Google benefits from offering a more interactive user experience.

Example of Business Ecosystem: Uber integrated in Google Maps

Example of Business Ecosystem: Uber integrated in Google Maps

 

Both Uber and Google share the same fate.

That’s how Marco Iansiti and Roy Levien definines the concept of ecosystem:

Like an individual species in a biological ecosystem, each member of a business ecosystem ultimately shares the fate of the network as a whole, regardless of that member’s apparent strength.

Business Ecosystem: A Thriving Trend

The software world has seen a constantly growing interdependence among major players as well as the small ones.

This is how business works. A company cannot sustain as a stand-alone creature.

To survive, you have to options: leading or following.

(1) Leading your own ecosystem creates an economic moat.

Something Warren Buffett likes as much as drinking Coke.

“In business, I look for economic castles protected by unbreachable moats.”

Where does it come from?

Leading an ecosystem provides your business with network effect, high switching cost, and—cherry on the cake—intangible assets like a brand.

(2) Being part of a strong business ecosystem gives you some protection from the competition.

By integrating with existing technologies, you can develop very innovative products. It is also a way leverage larger audiences.

 

More about Business Ecosystem:

  • https://hbr.org/1993/05/predators-and-prey-a-new-ecology-of-competition/ar/1
  • http://www.investopedia.com/ask/answers/05/economicmoat.asp
  • https://hbr.org/2004/03/strategy-as-ecology/ar/1
  • https://aaltodoc.aalto.fi/bitstream/handle/123456789/332/hse_ethesis_12200.pdf?sequence=1
  • https://signalvnoise.com/posts/333-warren-buffett-on-castles-and-moats
  • http://code.tutsplus.com/articles/the-increasing-importance-of-apis-in-web-development–net-22368
  • https://www.jisc.ac.uk/guides/the-advantage-of-apis