The economics, structure, and behavior of platform ecosystems and organizations

In Accelerating digital innovation, Gerald C. Kane, Doug Palmer, Anh Nguyen Phillips, David Kiron, and Natasha Buckley report on the fifth annual study of digital business by MIT Sloan Management Review and Deloitte. The team surveyed 4,800 managers, executives, and analysts and conducted 14 interviews with executives and thought leaders.

The key takeaway is that greater digital maturity leads to an acceleration in innovation trajectory and a greater reliance on ecosystem-driven innovation. And one major insight is that maturation includes a willingness to share control with ecosystem partners to boost innovation.

Here are the top-line findings:

  1. Digitally maturing companies innovate at far higher rates than their less mature counterparts.
  2. Employees of digitally maturing organizations have more latitude to innovate in their jobs — regardless of what those jobs may be.
  3. Digitally maturing companies are far more likely than their less mature counterparts to collaborate with external partners.
  4. Cross-functional teams are another important source of digital innovation. Not only are digitally maturing companies more likely to use cross-functional teams, those teams generally function differently in more mature organizations than in less mature organizations.
  5. Digitally maturing companies are more agile and innovative, but as a result they require greater governance.
  6. When asked to predict whether their company will be stronger or weaker moving forward, respondents from digitally maturing and early-stage companies show striking differences.

With regard to point 5, the authors add this:

Both ecosystems and cross-functional teams increase organizational agility. The risk of this increased agility, however, is that it can lead a company’s innovation efforts to outpace its governance policies. It is particularly important, then, that these organizations have strong policies in place regarding the ethics of digital business.

Shared ethics and their distribution through the network of players participating toward convergent goals in the ecosystem have to play the role of a market regulator might in a conventional marketplace. However, getting that right can be difficult, especially in less mature companies.

I want to highlight their findings on ecosystems innovation. In a nutshell, the research shows this:

At digitally maturing companies, 80% of respondents say their organization is cultivating innovation via partnerships. At developing organizations, that number drops to 59%, and at early-stage organizations it falls further still to 33%. Digitally maturing companies are (thus) more than twice as likely to work with external organizations to innovate, compared with the least digitally mature businesses.

The differences between the three levels of digital maturity do not represent a lack of understanding of the importance of ecosystem innovation. On the contrary. However, the less mature companies simply don’t create the same level or depth of partnerships, despite knowing they are critical.

The researchers interviews yielded specifics on how ecosystems drive innovation:

Integrating platform companies is one. Platform companies often end up as the hubs in innovation ecosystems, notes Geoffrey Parker, professor of engineering at Dartmouth College and coauthor of Platform Revolution. Platform companies, like Amazon and PayPal, are at least partly “open, and they often have default contracts that allow anybody to participate,” says Parker. That openness attracts “value-added partners that you don’t have to pre-identify and you don’t necessarily have to vet.” In contrast, old-school partnerships typically imply “a lot of due diligence, potentially contracts, cross-ownership, and a long-term relationship.” Dave Otten, CEO and founder of online video software platform JW Player, adds: “A platform can be part of the ecosystem. And a platform can enable a broader ecosystem. If you look at a platform company like YouTube, they are also a big part of the video ecosystem.”
Ecosystems also contribute to innovation through their collective access to diverse customers. In online video software development and distribution, Otten says, technologies like JW Player come together with advertising technology companies and advertising partnerships. All of them, along with the audiences they gather from across the broader web, form a collective ecosystem. Their combined understanding of audience feedback and behavior can play a critical role in the innovation process.

Youngjin Yoo of Case Western Reserve University thinks it is the flexibility of ecosystems that enhances innovation:

Ecosystems enable organizations to operate more flexibly, providing access to more collaborators and potential innovations.

This diagram shows a platform that attracts more collaborators who are drawn by a growing pool of diverse customers, thereby creating more innovations, and so attract more customers, and so on: a classic virtuous cycle.

However, even digitally mature companies have issues arising from working with external ecosystem partners:

Nearly half (46%) of all respondents cite challenges related to creating a collaborative culture and to aligning goals across an ecosystem. These results are consistent regardless of maturity level. When it comes to culture, companies struggle with employees and leaders who aren’t naturally inclined to collaborate with external partners.

Creating cross-company cooperation is made even more difficult by trying to define and align goals shared among all participants in the ecosystem. Again, Dave Otten offers hard-gained wisdom, suggesting companies have to cede centralized control of goal setting when working with others, and to

balance the need to hold on to the core of your culture, while letting go of the things you need to in order to grow up.

This is again a principle of fast-and-loose operations: everyone does not have to agree about everything. Therefore a great deal of time and energy can be saved by decreasing the central role of full consensus, and replace it with an operational philosophy of consent.

The core principles of the ecosystem have to be rock solid, and a system of governance in place to regulate that, but one organization must allow partners to make decisions in areas of their control even if they themselves would come to a different decision. That consent-unless-it-breaks-core-principles model is perhaps what Otten is alluding to when he mentions ‘growing up’.