Global ecosystems are breaking down barriers separating traditional industries and organizing the economy around key customer needs. In this episode of the Inside the Strategy Room podcast, the co-authors of the new book The Ecosystem Economy: How to Lead in the New Age of Sectors Without Borders, explain how companies can secure their place in the ecosystem evolution. Miklós Gábor Dietz leads McKinsey’s strategy and corporate finance work within our Financial Services Practice and Venkat Atluri heads up our Technology, Media & Telecommunications Practice. For more conversations on the strategy issues that matter, follow the series on your preferred podcast platform.
Sean Brown: Is the ecosystem economy a new phenomenon or something that has evolved over decades?
Venkat Atluri: The global economy has been evolving for centuries, but in the recent decade or so, some highly consequential phenomena driven by the ecosystem revolution have been shaping how value is created and who captures it. In the previous two or three decades, the companies with the highest market capitalization were primarily in the oil and gas sector, along with a few banks and pharma companies. In the past decade, the largest market-cap firms have tended to have ecosystem-oriented businesses. Technology giants dominate that group, but the common thread is an ecosystem business model.
Sean Brown: How do you define an ecosystem-oriented business?
Venkat Atluri: An ecosystem is a community of interconnected digital and physical businesses that come together, sometimes across traditional sectors of the economy, in the interest of providing customers what they want, when they want it, and in the form they want to consume it. This is typically enabled by businesses sharing assets, information, and resources, as a result of which they create value beyond what they could have achieved individually.
Sean Brown: How do ecosystem companies differ from traditional conglomerates?
Venkat Atluri: Ecosystem-oriented businesses typically start with customers—how do we create more value for customers?—while conglomerates tend to focus on diversifying their portfolios, bringing together sometimes loosely related or unrelated businesses. Secondly, ecosystem-oriented businesses usually anchor on a digital or physical platform and develop relationships with other companies around that platform. You see less of that in conglomerates. Thirdly, ecosystem-centric businesses tend to expand the pie and share it with their ecosystem partners. It’s also worth noting that ecosystem-oriented businesses are usually more profitable than conglomerates and a few players tend to capture much of that value.
Sean Brown: What’s behind the recent growth of these ecosystems?
Venkat Atluri: There are two major factors. First and foremost is the unprecedented level of technology acceleration. More patents were filed in the last 20 years than in the history of patent filing. The second driver is the evolution of consumer behavior and expectations. People are more comfortable with companies predicting what they want and providing it.
Sean Brown: In your book, you talk about these ecosystems erasing the boundaries between sectors. How does that happen?
Miklós Gábor Dietz: The interplay between the changes in technology and consumer behavior is revolutionizing the almost 10,000-year-old concept of the industry sector. Since ancient Sumer, economies have been organized into industries that were separated by various practical barriers, which are now breaking down. First, historically industries had unique data sets. Bankers, for example, were in the best position to understand who was most likely to pay back loans, which gave them a differentiation from other businesses. Now, big data, advanced analytics, and artificial intelligence are enabling players in other industries, such as telcos and retailers, to replicate the risk analytics of big banks.
Another barrier that has separated sectors are unique supply chains, but online marketplaces now enable anyone to enter a sector and quickly build a business. Distribution has been the third point of separation. To buy a computer, you would go to a computer store; for insurance, you would go to an insurance agent. With the advancement of smartphones and other technologies, it’s easy now for people to access different types of products and services on a single platform. Finally, unique systems and infrastructures that previously created barriers to entry between sectors can today be replicated through cloud-based services and other technologies.
Each multi-trillion-dollar ecosystem is ruled by unforgiving mathematics: a few large-scale platforms are likely to win a disproportionately large portion of the value because they will own the customer.
As a result, start-ups can enter and establish themselves in various industries very quickly. More profoundly, these changes have enabled companies to offer cross-industrial services, something customers love. The moment that happened, it started a tidal wave of transformation, because it turns out that the sector divisions created because companies needed them are not what consumers want.
Sean Brown: How are regulators responding to this blurring of industry lines?
Miklós Gábor Dietz: Businesses entering other sectors can sometimes have advantages when they are not covered by existing regulations, but regulators are catching up. Governments and regulators generally welcome the trend of reorganizing the global economy along customer needs because it improves competition and quality of services. In some markets, such as China, regulators have enabled this transformation to move much faster than elsewhere.
Sean Brown: The transformation has already been extensive. Where do you see this evolution leading?
Miklós Gábor Dietz: We believe that a large part of the global economy will eventually reorganize from traditional sectors to a structure based on fundamental customer needs like shelter and entertainment. Businesses likewise have fundamental needs: procurement, sales, finance. When we map these needs, we anticipate the emergence of 12 large ecosystems that can connect businesses and customers, forming a new economic structure (exhibit). Some, such as the home ecosystem that combines mortgages, real estate, and home services, would be bigger than any current industry.
We expect the total revenue pool of these ecosystems to be between $70 to $100 trillion by 2030. That would represent around 30 percent of the global economy, but more than 40 percent of total profits and more than half of the profits above the cost of capital. This is the single largest economic transformation of human history, which somewhat justifies the big bets capital markets have made on ecosystem players. In almost every industry, the leaders have cross-industrial, ecosystem-oriented business models. These models also tend to be more resilient during downturns because the fact that they span industries enhances stability.
Take the example of the home ecosystem. Until recently, it was extremely fragmented. You went to your real estate agent to find a home. You went to a bank to get mortgage, an insurance company to get home insurance, a furniture store to buy furnishings. Now, we increasingly see end-to-end operators appear. By 2030 or 2035, we believe that a few platform players will orchestrate end-to-end customer journeys of finding your home, moving into it, getting financing, and accessing home maintenance services. This is already happening in digital entertainment, where large platforms such as TikTok, Netflix, and Amazon Prime are orchestrating the sector.
Sean Brown: Do you see a danger of overconcentration and reduced competition if a handful of companies dominate these large ecosystems?
Venkat Atluri: On balance, the ecosystem revolution is creating a lot of good for the broader society. It’s driving economic growth, it’s serving customers the way they want to be served, and it’s presenting opportunities to create more value and drive innovation. However, it is concentrating value creation in the hands of fewer and fewer players, and one could argue that this concentration could potentially pose barriers to innovation. The level of influence these ecosystem businesses have on broader geopolitical and societal issues is also causing concern and debate.
Miklós Gábor Dietz: Each of these multi-trillion-dollar ecosystems is ruled by unforgiving mathematics: a few large-scale platforms are likely to win a disproportionately large portion of the value because they will own the customer. The goal in all this competition is customer ownership. That’s the holy grail of ecosystems. Whoever owns customers can orchestrate the ecosystem. The orchestrators don’t have to do everything; they can bring in partners. And the most important weapon in this war is data. Whoever owns the data will own the customer, and generally in this transformation, the customer will win.
Sean Brown: What are some potential hurdles in the way of this evolution or, alternately, factors that could accelerate it?
Miklós Gábor Dietz: Numerous elements will influence the outcome. The first one is regulation. Regulators across jurisdictions have different approaches, which is one reason why the speed of the transformation varies across markets. Sustainability and environmental pressures also have implications. Ecosystems can potentially provide the best solutions for a true energy transformation because they involve multiple sectors. Breakthroughs in artificial intelligence could accelerate the transition as well. Web 3.0, decentralized finance, cryptocurrencies, or even central bank digital currencies are additional factors that may shape winners and losers because they can transform payments and the fundamental structure of professional services such as banking and insurance.
Sean Brown: These are some far-reaching possibilities. How should business leaders prepare to participate in this ecosystem economy?
Venkat Atluri: First, you need to determine which ecosystem you want to build or be part of. Next, you need to choose your role. On one end of the spectrum, you could simply be a participant on someone else’s platform and leverage that platform to create value for your customers. At the other end, you could be the orchestrator—the company that develops and fosters the platform. That comes with a lot of responsibility. You need to be constantly evolving the platform and have an infrastructure mechanism through which you interact with the ecosystem partners. Naturally, there is room for only so many orchestrators and platforms.
Orchestrating an ecosystem comes with a lot of responsibility. You need to be constantly evolving the platform and have an infrastructure through which you interact with the ecosystem partners. And, naturally, there is room for only so many orchestrators.
There are variations between those two extremes, such as participating in one ecosystem and orchestrating another. For example, ride-sharing apps are part of larger smartphone ecosystems, but they have ecosystems in their own right. In some cases, you may not have all the capabilities you need for the role you want to play, so picking the right model and collaborators is important.
Sean Brown: What business models do ecosystem companies tend to use?
Venkat Atluri: Business models also span a spectrum. For software, it’s largely an open-source model that aims to foster the ecosystem and promote greater good, then companies find ways to service that ecosystem and monetize their services. On the other end, you can create value collectively and share that expanded pie—not only in dollars and cents but in the equity you generate.
Sean Brown: What kind of culture and operating model do the most successful players have?
Venkat Atluri: The leaders in the ecosystem economy will be those who are agile, not just in IT development but in how they operate. Diversity of thought and experience are also crucial. Perhaps most important is performance management. The regimented model of reviewing teams every month or every quarter is not a recipe for success in this new economy. It has to be more of a fluid, continuing dialogue.
Sean Brown: How difficult is it for traditional incumbents to transform into ecosystem-oriented companies?
Miklós Gábor Dietz: Multiple incumbents in different sectors have evolved into ecosystem businesses. Many are global, which is important because ecosystems are global phenomena. Building ecosystems is not very capital intensive and early successes can lead to measurable improvement in customer ownership and margin, which in turn gets rewarded by capital markets. You can go into a positive spiral by escaping the gravity of your industry and your inventory business model.
Sean Brown: Which industries will see the largest disruption from the ecosystem model?
Miklós Gábor Dietz: Banking may be the sector facing the biggest fundamental challenges: disintermediation, disaggregation, commoditization, and invisibility. Banks had unique distribution advantages, but branches are less valuable now, and their data advantage has also diminished. Banks’ legacy IT systems can now be replicated at a tenth of the cost through cloud-based services, which is why we have seen a proliferation of fintechs. We are already seeing banks dismantling their portfolios and cherry-picking the most profitable parts. The mortgage business is a natural part of the home ecosystem, for example, while everyday payments are a natural part of commerce.
On the positive side, banks are well positioned to orchestrate some ecosystem. Since they already offer mortgages, why not provide the end-to-end journeys of buying and owning the home? Banks are also well positioned to orchestrate the small-business ecosystem, combining their existing banking relationships with administrative, technology, HR, even software services. Banks could also use their payment rewards businesses to enter or orchestrate commerce ecosystems. Likewise in the retail industry, we see both traditional retailers and e-retailers turning their loyalty programs into digital relationships with customers, entering into finance, and expanding their services into other ecosystems, such as health, through partnerships.
Sean Brown: What advice would you give to those looking to become ecosystem leaders?
Miklós Gábor Dietz: Rule number one: aim for a quantum leap in customer experience. Merely providing interconnected services may not be enough to change behavior—you need to give customers something meaningful and exciting. As Venkat mentioned, you should also choose your role very consciously. In most of these multi-trillion-dollar ecosystems forming around customer needs, there will be room for a few major platforms and a few niche ones. Most companies have little chance of orchestrating these ecosystems, so they should recognize that early role.
Thirdly, the most successful business model for ecosystems is a platform—online to offline. Capture these two universes and combine them. You also need to understand that an ecosystem partnership is very different than a vendor–supplier relationship. Every company has an ecosystem of suppliers, sales partners, and distributors, but don’t confuse that with the true value-sharing partnership that an ecosystem requires.
Furthermore, the leading ecosystem companies understand where the true leverage points are in the customer value chain. The art of ecosystem orchestration or successful participation is not to do everything for the customer—most elements of the customer journey have little value-add—but to find a few critical points where the important data is generated and where you can control the journey.
The last point is getting organizational governance right. Our analysis of failed ecosystem efforts shows that more than 80 percent of them were at least partially caused by governance issues. It’s very hard to develop an ecosystem within the existing organization. Developing it too close to the traditional business will put too much pressure on people to both run and reinvent the business, and building the ecosystem too far away from the core business can make it disconnected. You need find the Goldilocks zone.