Identifying, Mapping, and Managing the Innovation Ecosystem at Corporate Level

The challenges and uncertainties of the 21^st century have continued to change the basic concepts and practice of strategic management. The rapidly changing environment has created environmental uncertainty, which is a threat to strategic managers because it impairs their ability to develop long-range plans and make effective strategic decisions to keep the firm stable with respect to its external environment. Therefore, the focus of the strategy has shifted from making plans to more on creating strategic options for the future. And the complexity of challenges that emerged from complex ecosystems and digital technologies has made traditional companies more dependent on outside firms, and therefore, forced them to move beyond their boundaries to form strategic alliances and other forms of collaboration to grow and remain competitive in their industries. But working with external partners in the firm’s ecosystem can cause interdependency, governance, and other issues. Therefore, managing the innovation ecosystem can be very challenging at the corporate level.

Today’s technology-based products (and services) are complex and incorporate multiple technologies, therefore no single firm possesses the required resources and capabilities to develop, finance, manufacture, and market the innovation. These resources are called complementary resources. Complementary resources can be accessed through strategic alliances or any other collaborative arrangements with other firms. External innovators (complementors) play an important role in creating network externalities and therefore become a major source of massive value creation for the firm. When many external innovators’ contributions are combined, it forms an innovation ecosystem. Ecosystem partners create market value and capture value for the firm and themselves, and the division of value between them will depend on the relative power of firms.

An innovation platform provides a base for launching new products, services, and applications of complementary products. Innovation platforms and ecosystems create positive feedback effects. External innovators can provide direct innovation support to the main platform, as well as indirect support through the development of complements (e.g., applications). Internal and external innovators supported the development of Apple’s iPhone. And on its iPhone platform, external innovators have developed thousands of applications software.

The initial design of an innovation ecosystem begins with identifying the major elements or groups of players within the firm’s ecosystem, then mapping and categorizing them for analyzing and designing the ecosystem related to the most important strategic variables relevant for creating value and managing the ecosystem. The mapping, analysis, and design of the ecosystem are described in subsequent paragraphs.

Managing the Innovation Ecosystem

The management of the innovation ecosystem is a complex undertaking. The key issues facing senior management in managing the innovation ecosystem are related to value creation, capture and value sharing; interdependencies; coordination and integration; and competition. However, to manage the innovation ecosystem, we must first extend competitive and industry analysis to consider the role of complementary products, network externalities, platform-based competition, and business models relevant to the innovation ecosystem.

Complementary Products

While complementary products increase the value of the principal product, substitutes reduce its value. In some industries, complements can create network externalities and platform-based competition.

Network Externalities

Complementary products create direct and indirect network externalities. Network externalities generate positive feedback, particularly in products associated with digital technologies. Once the technology gains market leadership, it expands the user base-that creates a situation in which winner-take-all markets.

Platform-Based Competition

Platform-based products and services compete in platform-based markets. Platforms are the sources of complementary products and therefore, these products give rise to platform-based competition and business ecosystems. Platform-based markets are also called two-sided (or multi-sided) markets because they form an interface between two groups of users: customers and the suppliers of complementary products. Microsoft’s Windows and Google’s Android are platform-based businesses. They create direct network effects among users and indirect network effects among suppliers of applications products.

However, to understand the competitive environment of platform-based businesses, the extended industry analysis becomes essential without which firms cannot make effective strategic decisions. The extended industry analysis can help us better understand the role of complements, business ecosystems, and extended business models. Therefore, to understand the competition and the determinants of profitability in platform-based markets, we need to go beyond porter’s five forces analysis. This is accomplished by adding a sixth force to Porter’s five force framework.

 The Role of Corporate Management

The primary role of corporate management in the innovation ecosystem is to identify and select the right partners and manage the collaborative relationships with them to create and capture value for the firm and the ecosystem partners in a way that maximizes the value of the innovation ecosystem and the parent company in the long run. This may also require finding innovation partners from outside the firm’s ecosystem and forming new strategic alliances with them.

Four important strategic management activities are described below, through which corporate management can add value to their innovation ecosystem and capture an appropriate value for the parent company.

Portfolio Analysis

Portfolio management has been extensively used to manage internal innovation in the past. However, portfolio management can also be used to manage the innovation ecosystem partners’ portfolios. Portfolio analysis models and their derivatives-the bubble diagrams can be used as a strategy tool for mapping, analyzing, designing, and managing the strategic performance of the innovation ecosystem partners. These portfolios can comprise projects, products, markets, sectors, and technological areas where the innovation ecosystem partners can focus their innovation efforts. Top management sees these portfolios as a series of investments from which they should generate the best return. Individual ecosystem partners’ portfolios can be represented in terms of important strategic variables that will determine the long-term profit potential of these partners for the firm. These strategic variables are related to the market attractiveness of the ecosystem and their potential for generating competitive advantage within the industry. Portfolio analysis of these portfolio models can guide us in allocating resources, maximizing value, formulating innovation ecosystem strategy, analyzing portfolio balance, aligning strategic portfolios, and setting strategic targets based on market attractiveness and competitive position of the business ecosystem. Three of the most well-known approaches are the GE/McKinsey matrix, BCG’s Growth-Share matrix, and strategy map analysis models that can be used in formulating the corporate strategy for the innovation ecosystem.

The GE/McKinsey Matrix

Portfolio analysis models can be used to graphically depict individual innovation ecosystem partners (complementors’ projects & products) in terms of industry attractiveness and their potential to generate competitive advantage for the innovation ecosystem.

In the GE/McKinsey matrix, industry attractiveness is typically plotted on Y-axis and can comprise profitability, market growth rate, market size, and opportunities. The competitive advantage generated for ecosystem partners and the parent company is plotted on the X-axis and can include return on sale relative to competitors, and relative position with respect to other parameters, such as technology, quality, and cost.

The BCG’s Growth-Share Matrix

This matrix is akin to the GE/McKinsey matrix and plots industry attractiveness on the Y-axis and innovation ecosystem partner’s competitive position on the X-axis to compare and understand the relative strategic positions of partners. However, it uses only one parameter for each X-Y dimension: industry attractiveness is displayed in terms of rate of market growth on the Y-axis, and the competitive advantage by relative market share on the X-axis. It is simple to construct and can provide a clear understanding of the innovation ecosystem’s portfolio relative to some important strategic variables.

Bubble Diagrams

Some other mapping approaches for portfolio analysis of projects typically include the use of bubble diagrams, which are the extensions of the portfolio models, as discussed above. Different kinds of parameters related to business and innovation can be plotted on the X-Y axis in a bubble diagram format. Some examples of these diagrams are risk vs. reward, probability of success vs. NPV, and strategic intent vs. market segments served.

Strategic Map

Strategic arenas—the areas where you want to focus your innovation partners’ efforts, are plotted on the two-dimensional X-Y chart to identify how various arenas perform. Arena attractiveness or opportunities are plotted on the X-axis, and business strength on the Y-axis. The two quadrants are further disaggregated to form a four-sector diagram, each sector representing a unique opportunity. The strategy map can be used to identify and prioritize attractive arenas to maximize ecosystem value and to make resource allocation decisions.

Strategic Control Against Milestones

The management of the innovation ecosystem partners (complementors or external innovators) can be quite challenging to the top-level management. To implement innovation strategies successfully, strategic plans should be linked to performance targets and operational plans. However, top management is responsible for monitoring and achieve strategic goals or targets. Strategic targets can be related to market share, growth, profitability, and new complementary product introductions by ecosystem partners or jointly (partners and the firm) that can be defined in terms of strategic milestones. Milestones are specific dates on which performance goals are achieved, or something important is delivered. Milestones make the implementation plan action oriented. The top-level management typically monitors target results on a quarterly or bi-annual basis to capture any large variances from the targeted performance. If a milestone signals us that something is not performing as planned, then a strategic (medium-to-long-term) corrective action will be needed.

Systems Integration

An Innovation ecosystem outsources many of its innovation ecosystem activities to external alliance partners. When an innovation company grows, it expands its innovation ecosystem by adding more external innovators to its ecosystem through strategic alliances. The more a firm collaborates with external partners, the more it will require developing systems integration capability to integrate and coordinate the widely scattered innovation activities. This capability will help the firm to also manage interdependencies effectively. For example, the late market introduction of HDTV was mainly because of lack of coordination and integration capabilities among TV manufacturers, broadcasters, and production studios that led to the failure in managing interdependencies.

Managing Linkages Among Ecosystem Partners

When the parent company is closely linked to the innovation ecosystem partners, it provides opportunities for value creation by sharing resources and transferring knowledge and capabilities within the firm’s innovation ecosystem. The most important sources of value are created from exploiting economies of scope (using common resources and activities) and economies of scale (by lowering costs) in the innovation ecosystem. For example, partners in the Android ecosystem share a common platform through which different types of new applications (i.e., games and mobile services) are launched-creating demand-side economies of scope. To achieve the benefits of these economies, corporate management must be able to coordinate and integrate these activities cost-effectively the widely scattered capabilities, resources, and knowledge of ecosystem partners.

References and Further Reading

1. R. M. Grant, Contemporary Strategy Analysis (NJ: John Wiley & Sons, Ltd., 2018), Chapters 1, 3, 4, 9, and 13.
2. Peter C. Evans and Annabella Gawer, The Rise of the Platform Enterprise (The Center for Global enterprise, NY), January 2016.
3. Ashok N., Important Elements of Value Creation in an Ecosystem, A&N Strategy Consulting (April 8, 2018).
4. R. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2013), Chapter 14.
5. T. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (NJ: Prentice-Hall, 2000), Chapters 3 and 6.
6. Robert G. Cooper and Scott J. Edgett and E. J. Kleinschmidt, Portfolio Management for New Products (NY: Basic Books, 2002), Chapters 1, 4 and 5.
7. Robert G. Cooper and Scott J. Edgett, “Product Innovation and Technology Strategy (US: Product Development Institute Inc., 2009),” Chapters 3 and 4.
8. Larry Bossidy & Ram Charan, Execution: The Discipline of Getting Things Done (NY: Crown Business, 2002),197-201.
9. Ashok N., Effective Performance Measures of Corporate Control, A&N Strategy Consulting (April 8, 2018).
10. Williamson, Peter James, and De Meyer, Arnoud. Ecosystem Advantage: How to Successfully Harness the Power of Partners. (2012). California Management Review. 55, (1), 24-46.
11. Emily Wise, “Stewarding innovation portfolios for the ecosystem: catalyzing collective system change,” Observatory of Public Sector Innovation (May 11, 2021).
12. M. Talmar, et al., “Mapping, analyzing and designing innovation ecosystems: The Ecosystem Pie Model,” Long Range Planning 53 (2020) 101850.