This blog post, which is the second installment in a series based on our academic paper inResearch Policy "Profiting from Innovation in Digital Business Ecosystems:A Control Point Perspective," co-authored by Rene Bohnsack, Michael Rennings, Carolin Block and Stefanie Bröring, takes a closer look at the profound transformation from the industrial era to the digital age. This transition marks a significant evolution in how businesses approach the architecture of their products and services, and ultimately, how they capture value.
During the industrial era, companies became successful by developing and optimizing products designed around modular architectures. In industries like automotive manufacturing for instance, this modularity ushered in the era of mass manufacturing, making cars affordable to a much broader segment of the population. Motor-vehicle manufacturers like Ford shot to prominence by mastering the design and integration of interchangeable parts, which streamlined the assembly process and reduced costs exponentially. As a consequence, Ford could capture tremendous market share and secure substantial financial gains. In a nutshell, this approach allowed for efficient production and customization through interchangeable parts, facilitating economies of scale and boosting operational efficiency.
A thoroughunderstanding of each component's role within the modular system was thereforecrucial to success at this time, and complementary assets played a pivotal rolein securing competitive advantages. These unique, often proprietaryresources—such as advanced production technologies, extensive distributionnetworks, or exclusive supply chains—were essential for establishing marketdominance. Value was derived mainly through the optimization of these tangibleassets, with a strategic focus on controlling critical aspects of productionprocesses and supply chains. Essentially, what this meant was that the businessecosystem of the day was characterized by a low number of partners and aunified value proposition, emphasizing coordinated interdependencies amongstakeholders. However, these complementary assets also created bottlenecks thatprovided bargaining power.
As theinevitable march of progress drove us into the digital age, the architecturalparadigm of the era of Fordism and Taylorism shifted towards more complex,layered modular systems where the integration of digital and physicalcomponents created more dynamic business ecosystems.
Unlike thestatic modularity of the industrial era, digital ecosystems are characterizedby their flexibility, scalability, and integration across diverse platforms andindustries. This new model supports dynamic, interconnected systems where valueis co-created by various actors within a digital ecosystem. Product boundaries havebecome became fluid, components product-agnostic, and design hierarchies havemultiplied, meaning that this new architecture necessitates an agile andflexible approach to product development, supported by a broadenedunderstanding that is both product-architectural and deeply ingrained in thetechnology itself.
In these newdigital ecosystems, the concept of control points adds a new dimension to thetraditional reliance on complementary assets and bottlenecks. Control pointsare strategic positions within a digital ecosystem that allow companies tomanage dependencies, exert influence, and capture value. These can betechnical, such as APIs and data analytics platforms, or strategic, such ascustomer access points and ecosystem orchestration.
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In this open-ended digital ecosystem, the strategies for profiting from innovation(PFI) are evolving continuously. The ownership of complementary assets and themanagement of bottlenecks, which once determined PFI, are giving way for theaddition of new forms of value capture and creation. Digital technologiesenable the recombination of elements to generate value in innovative ways,necessitating command over control points like customer access, platformownership, and unique content.
Governance indigital ecosystems also revolves around the concept of openness - the degree towhich an ecosystem allows for open collaboration and innovation through itsplatforms. There’s a delicate balancing act between too much and too littleopenness that firms must navigate - too much could lead to a dilution ofquality, while too little could stifle innovation and growth. An example thatsprings to mind is the case of Atari.
During theheight of its success, Atari operated with an open platform, allowing for allmanner of game developers to contribute to its ecosystem. However, this fullopenness led to an over-saturation of low-quality games, which ultimatelydamaged the brand and contributed to its decline. This shows that whileopenness can stimulate innovation and growth, without strategic control andgovernance—such as quality control measures—it can also lead to a decrease inoverall ecosystem quality. The key to successfully capturing and holding ontoyour control points while maintaining a healthy ecosystem therefore lies in carefullymanaging the balance between control and autonomy.
If businesses are to navigate this dynamic landscape successfully and thrive, they need to develop strategies that seamlessly incorporate digital technologies. They need to transition from a traditional asset optimization and value-chain focus to leveraging digital or technical control points within broader ecosystems. How do we do this?
1. Embrace agility and flexibility: The shift towards layered modular architectures in the digital era necessitates a more agile and adaptable approach to product development and business strategy. Leaders should cultivate an environment that encourages rapid prototyping, iterative learning, and the flexibility to pivot or scale operations in response to changing technological landscapes and market demands.
2. Strategically manage control points: As traditional assets give way to control points likeAPIs, data analytics, and platform interfaces, leaders must focus on identifying and securing these critical points in the digital ecosystem.Effective management of these control points allows for greater influence over the ecosystem, making strategic investments in technology and partnerships essential.
3. Balance openness with governance: The digital age offers unprecedented opportunities for collaboration and innovation through openness. However, as the Atari case shows us, too much openness without adequate governance can dilute quality and harm your brand. Leaders must therefore carefully calibrate their openness strategy, implementing resilient governance frameworks to ensure quality and sustain long-term ecosystem health. They need to create an equilibrium that promotes innovation while protecting core business interests at the same time.
As this seriescontinues, we will take you through a detailed exploration of how businessescan effectively leverage digital ecosystems and control points to maintain andenhance their market position, and ultimately thrive in the ever-evolvingdigital landscape. Stay tuned for our next post, which will raise themagnifying glass up to the question of how and why to use control points asstrategic levers in a digital ecosystem, and the case of smart farming.
DSI-LAB is a research group at Católica Lisbon School of Business and Economics, specializing in digital technologies and sustainable business models.
