In today's rapidly evolving digital landscape, businesses across various sectors are finding themselves at a crossroads. The transition to digital business ecosystems is no longer a choice but a necessity for survival and growth and is changing the the ways in which companies create and capture value. In this 5th post in our series based on "Profiting from Innovation in Digital Business Ecosystems: A Control Point Perspective," co-authored by René Bohnsack, Michael Rennings, Carolin Block and Stefanie Bröring, we’re going to take a closer look at this evolution through the lens of smart farming to see what the pathways are that incumbents, new entrants, and diversifying entrants (from both related and unrelated industries) take during this transition. Understanding the strategic pathways that companies take as they drive their way into these emerging digital ecosystems is crucial for managers aiming to position their firms advantageously.
As we discussed in our previous posts, the concept of control points is central to understanding the new digital business ecosystems. Control points are strategic or technical points (as opposed to traditional bottlenecks) in a digital business ecosystem that competitors must navigate through, giving the company holding these points significant bargaining power. These can be either strategic, such as brand recognition and customer access, or technical, such as digital content and data. A successful company must combine both types of control points to create and capture value effectively. In other words, we can think of control points as being force multipliers that enable firms to create and capture value in an ecosystem, and different strategic groups—incumbents, new entrants, and diversifying entrants—adopt distinct approaches to setting and leveraging control points in their ecosystem based on their initial or "going-in positions.”
Incumbents start their journey with a strong foothold in the physical layer of their industry. Their transition into digital ecosystems often begins with integrating digital technologies into their existing operations. This process typically unfolds in phases:
Phase 1 - Analog to digital transition: Incumbents initially complement their physical control points with technical control points on digital layers. This step often involves trying to gain the necessary technical knowledge and deploying digital solutions to enhance their traditional products and services. For instance, a chemical company in the agricultural sector might develop software solutions that provide farmers with data-driven recommendations to help them optimise crop production.
Phase 2 - Mastering digital layers: As incumbents gain knowledge and expertise in digital technologies, they seek to capture more value from these new layers. This phase might involve companies starting to offer integrated business models, such as combining hardware sensors with software solutions to provide more comprehensive services to farmers.
Phase 3 - Providing holistic solutions: Ultimately, incumbents aim to offer one-stop solutions that integrate various systems and address the broader needs of their customers. For example, a large equipment manufacturer might develop a platform that connects different farming equipment, enabling a seamless data flow and improved decision-making for farmers.
Throughout these phases, incumbents leverage their deep industry knowledge and established relationships to enhance their digital capabilities. However, they must continuously learn and adapt to maintain their competitive edge.
I think in this phase (and for all phases) it is important what kind of knowledge is lacking or needs to be developed. In this case, the incumbent needs to gain knowledge about deploying the digital technology in the ecosystem.
Diversifying entrants from related industries, such as technology and software providers already familiar with some aspects of the ecosystem, enter the digital business landscape by leveraging their existing technical control points and gradually acquiring industry-specific knowledge. Their transition involves:
Phase 1 - Initial entry with adapted solutions: These entrants, having little industry knowledge, start by learning about the new industry and adapting their existing solutions to its requirements. For example, a technology provider with expertise in IoT from might develop sensors specifically designed for agricultural applications.
Phase 2 - Learning and collaborating: Through collaboration with incumbents, these entrants deepen their understanding of industry-specific needs and look for ways to create value. They work closely with established agricultural players to tailor their offerings, ensuring they meet the unique demands of smart farming.
Phase 3 - Offering integrated solutions: As they gain more industry knowledge, diversifying entrants from related industries can offer more integrated and comprehensive solutions, capturing value. For instance, a software provider might develop a platform that not only collects data but also integrates it with various farm management systems, providing farmers with holistic insights.
Here again it is important to stress that the div entrant lacks knowledge, in this case industry knowledge. That is why AWS does hackathons in different industries (e.g. energy) with incumbents to learn about the industry.
Diversifying entrants from unrelated industries bring valuable technical knowledge to the mix, but they face the challenge of acquiring deeper industry-specific knowledge. Their pathway involves a more gradual adaptation process:
Phase 1 - Entry with generic solutions: These entrants begin by offering platforms and digital infrastructure that connect various elements within the ecosystem. These solutions are often generic and need adaptation to meet the specific requirements of the new industry.
Phase 2 - Learning and adapting: Through collaboration with incumbents, diversifying entrants from unrelated industries work hard to overcome the disadvantage of having little industry knowledge. By acquiring industry knowledge through these collaborative efforts, they start adapting their solutions to address specific needs, such as developing tailored platforms for smart farming that integrate with existing agricultural practices.
Phase 3 - Offering specialised solutions: As these entrants gain a better understanding of the industry, they start offering specialised solutions that leverage their significant technical expertise, often generating very creative, fresh solutions in the field. For example, a software provider might develop advanced analytics tools that provide farmers with actionable insights based on collected data.
New entrants, particularly startups, bring new ideas and innovative solutions to the digital business ecosystem. They are often characterised by agility and a focus on addressing specific niche needs. The strategic pathway for new entrants typically includes:
Phase 1 - Niche innovation: New entrants often start by developing unique technical solutions for specific problems within the ecosystem. For example, an AgTech startup might create a drone-based service that collects data on plant health, reducing the need for manual labor.
Phase 2 - Building partnerships: Due to limited financial resources and industry knowledge, new entrants often collaborate with incumbents and diversifying entrants. These partnerships help them gain industry insights and access to broader markets, enhancing their ability to capture value.
Phase 3 - Expanding and scaling: Successful new entrants gradually expand their offerings and scale their operations. They might move from providing niche solutions to offering more comprehensive services that integrate with existing systems. For instance, a startup specialising in field robots might develop additional capabilities, such as soil analysis and yield prediction, to offer a more holistic solution.
New entrants' agility and innovative spirit enable them to quickly adapt to changing market conditions and emerging opportunities. However, their long-term success often depends on their ability to build strategic partnerships and continuously innovate.
For managers navigating the transition to digital business ecosystems, understanding these strategic pathways is essential. Each pathway offers unique challenges and opportunities:
• Incumbents: Leverage your industry expertise and established relationships to transition into digital ecosystems. Continuously integrate and innovate to maintain your competitive edge. Strengthen your foundation, then build upward with digital layers.
• Diversifying entrants from related Industries: Focus on adapting your technical expertise to the new industry's specifics. Collaborate with incumbents to deepen your industry knowledge. Build specialised solutions tailored to the ecosystem's needs.
• Diversifying entrants from unrelated industries: Be prepared for a steeper learning curve. Overcome the learning curve through strategic alliances and gradual adaptation. Prioritise building partnerships with industry incumbents to gain the necessary industry insights and adapt your offerings to meet specific needs.
• New Entrants: Prioritise innovation and agility, starting with niche solutions that address specific problems. Build strategic partnerships to gain market insights and expand your offerings. Innovate fast, partner wisely, and scale strategically.
This strategic analysis provides a roadmap for managers navigating the complex landscape of digital business ecosystems. By understanding and navigating these pathways effectively, companies can position themselves to create and capture significant value in the digital age.
In our next post, we will discuss how policy and regulation form institutional boundaries that impact the dynamics of digital business ecosystems and advise managers on navigating these external factors and leveraging them for ecosystem engagement and innovation.
DSI-LAB is a research group at Católica Lisbon School of Business and Economics, specializing in digital technologies and sustainable business models.
