Navigating digital disruption effectively requires a deep understanding of industry and component knowledge, which firms utilize to set strategic and technical control points within digital business ecosystems. These control points, which can include both technical solutions like advanced data management systems and strategic assets such as solid brand recognition, provide companies with bargaining power and superior opportunities for both value creation and capture.
This latest blog 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, explores this dynamic to uncover some actionable insights for business leaders.
Control points, far from being mere bottlenecks with an ecosystem, are strategic and technical solutions and features that provide companies with significant bargaining power and offer them superior opportunities for both value creation and value capture.
Control points allow companies to exert influence within their ecosystems. For instance, technical control points might involve proprietary algorithms that enhance a company’s operations within digital platforms. On the other hand, strategic control points might include exclusive partnerships or customer engagement strategies that limit competitors' market access and boost customer loyalty. Unlike traditional bottlenecks which only restrict flow, control points can actively shape and direct it, serving as a force multiplier in business strategy by ensuring competitors cannot bypass these strategic placements without conceding significant advantages. Take the streaming TV market as an example. For streaming services network speed is essential, meaning that a slow connection is a significant bottleneck that can impair service quality and impact its customer appeal. Netflix overcame this bottleneck by creating Open Connect, its proprietary Content Delivery Network (CDN), an investing over $1b in exclusive servers globally. This strategic move gives Netflix a competitive advantage, since it enables them to offer a higher quality service than competitors relying on third-party CDNs. This example shows how a systemic bottleneck was leveraged by a company by establishing a technical control point within its ecosystem, allowing it to create value for its customers.
The roles of technical and strategic control points within the ecosystem are distinct yet interconnected. Technical control points focus primarily on innovation, allowing firms to introduce disruptive technologies or processes that improve operational efficiency and product offerings, thereby creating value. This is evident in how features like modularity and scalability - once considered mere technical details - have become important control points that enable firms to integrate with broader ecosystem dynamics and leverage co-creative ventures.
Conversely, strategic control points are crucial for capturing and securing value. They leverage a firm’s strategic assets to secure competitive advantages, such as establishing a dominant platform that other businesses must use (remember the case of John Deere from our previous post?) or creating customer engagement strategies that lock in loyalty and recurring revenue.
Control points within digital ecosystems are profoundly influenced by two distinct types of knowledge that determine how firms navigate and succeed in these environments: industry knowledge, and component knowledge.
The interaction between industry knowledge and component knowledge plays a vital role in how firms establish and leverage control points. Industry knowledge helps firms understand the market dynamics, customer behaviors, and regulatory environments. For example, incumbents are likely to use their industry knowledge to enhance or modify existing systems and processes, introducing digital innovations that align with their established business models. This might include a bank leveraging fintech innovations to offer secure, user-friendly digital banking solutions, thereby fortifying its control over financial transactions. Consider Santander, which has been undergoing a major digital transformation that saw it migrating its Corporate and Investment Banking platform to Google Cloud, thereby greatly improving the banking experience for their customers and fortifying brand loyalty.
Component knowledge, in contrast, involves a deep understanding of specific digital technologies or components.
Diversifying entrants, for example, bring with them fresh component knowledge from other industries, enabling them to introduce disruptive solutions and set new technical control points. For instance, Apple offers a credit card to its customers in the United States, and in 2023 launched an additional zero-fees, high-yield savings account with Goldman Sachs. Or related industry diversifying entrants would apply their component knowledge to traditional offerings in related markets. A company that springs to mind is JPMorgan Chase, which leveraged its extensive data analytics capabilities develop a range of insurance products, including health, life, and property insurance, tailored to its existing banking customers.
New entrants, on the other hand, often disrupt industries by introducing breakthrough technologies or business models, using their component knowledge to establish new technical control points that challenge existing standards and practices. Think about a new entrant in the financial sector harnessing blockchain technology to introduce secure, decentralized payment systems, or the entry of fully digital banks like Revolut and N26 into the financial sector.
As businesses evolve within these complex digital landscapes, their ability to strategically manage and leverage control points becomes a significant determinant of success. By mastering the dynamic interplay between industry and component knowledge, firms can not only adapt to digital disruptions but also actively lead and shape the ecosystems in which they operate. This mastery is essential for firms aiming to sustain their market positions and achieve long-term success in an increasingly digital world.
So, what are some actionable insights we can learn from this discussion, from a managerial perspective?
The transition to a digital-first business model, while challenging, opens doors to unparalleled opportunities for innovation, growth, and value creation. To thrive in this new era, businessleaders must embrace a strategic framework that prioritizes adaptability, collaboration, and ecosystem integration. Key strategic considerations include:
1. Optimize market dynamics through control points: Employ control points strategically to mold ecosystem dynamics and carve out a competitive edge. Capitalize on technical control points to improve products and efficiency, and harness strategic control points to develop lasting customer relationships and revenue-enhancing opportunities.
2. Form collaborative ecosystem partnerships: To maximize the effectiveness of control points, build partnerships with other players within the ecosystem. Collaborative relationships can extend your reach and enhance your capabilities, allowing you to leverage complementary strengths. For example, partnering with tech startups can bring fresh insights and innovative solutions that enhance your product offerings or operational efficiencies.
3. Monitor and respond to ecosystem dynamics: Regularly monitor the ecosystem’s dynamics to anticipate market shifts and adjust your strategies accordingly. This involves not only tracking competitors' moves, but also staying attuned to changes in customer expectations and technological trends. Quick and strategic responses to these changes can help your firm maintain its competitive edge and capitalize on new opportunities as they arise.
In our next post, we will look at the strategic pathways for transitioning into digital ecosystems, focusing on how companies can manage these changes effectively. Whether you're an incumbent looking to maintain market share, or a new entrant aiming to disrupt, we'll explore practical steps to enhance your ecosystem strategy.
DSI-LAB is a research group at Católica Lisbon School of Business and Economics, specializing in digital technologies and sustainable business models.
