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If you’re not building an ecosystem, chances are your competitors are

Failing to embrace digital platforms is one of the biggest pitfalls in digital strategy
If You’re Not Building An Ecosystem, Chances Are Your Competitors Are

Martin leads McKinsey's global Strategy Practice. He is one of McKinsey's most experienced client leaders on topics including strategy, growth, and business transformation in emerging markets.

A few years ago, Intuit’s management sat down to assess the potential impact on its business of new fintech start-ups. Not surprisingly, the developer of financial software saw significant risk in digital newcomers going after its customers. But the company’s strategic review also showed that Intuit had financial power and scale its rivals lacked—muscles it could flex in battling competition. The leaders decided to acquire new digital assets to expand beyond existing small-business and tax products in an effort to reach tech-savvy consumers happy to use software apps to help manage their money.

Today, three offerings—Mint (for consumers), QuickBooks (for small businesses), and TurboTax (for both)—are available with one login. Intuit also gives banks the ability to integrate their customer accounts with its products, making it easier for users to pay their bills online. In essence, the company went from selling individual products to launching a digital ecosystem.

Such ecosystems today power seven of the world’s 12 largest companies by market capitalization. It’s a startling statistic, especially when you consider that some of them (Facebook, Alibaba, Google) are less than two decades old. This development is a hallmark of how much and how fast digital technologies have transformed the business world, in the process upending some long-held economic principles.

The emergence of platforms that allow players to move easily across industry and sector borders is among the most disruptive changes digital technology has wrought. And the failure to sufficiently embrace such business models is one of the five pitfalls my colleagues and I recently described as leading culprits of failed digital strategies.

Plans that only address the context of your industry are likely to face severe challenges. In the wake of Amazon’s acquisition of Whole Foods, for example, grocery stores in the United States need to make sure their strategies account for moves this giant digital-platform player will make, not just the chain down the street. Apple Pay and other platform-cum-banks are starting to compete with traditional financial institutions. In China, Tencent and Alibaba are expanding their ecosystems, linking traditional and digital companies (and their suppliers) in the insurance, healthcare, real estate, and other industries—and in the process aggregating millions of customers across these sectors.

Digital ecosystems today power 7 of the world’s 12 largest companies by market capitalization

Today, ecosystems make possible improbable combinations of attributes. Think of a competitor that offers the largest inventory, the fastest delivery time, the greatest customer experience, and low cost, all at once. You probably learned in your MBA strategy class that this is an unlikely mix. In the textbook case, the choice is between costlier products with high-quality service and higher inventory levels, or cheaper products with lower service levels and thinner inventories.

But supply and demand works differently in the economics of digital platforms and ecosystems. Here, the best companies have the scale to reach a nearly limitless customer base, use artificial intelligence and other tools to engineer exquisite levels of service, and benefit from often frictionless supply lines. All this results in some surprising business models. Facebook is now a major media player while (until recently) producing no content. Uber and Airbnb sell mobility and lodging around the world without owning cars or hotels.

The influence of platforms will only accelerate. Our research shows that an emerging set of digital ecosystems could account for more than $60 trillion in revenue by 2025, or more than 30% of global corporate revenue.

In a world of ecosystems, as industry boundaries blur, strategy will require a much broader frame of reference. In other words, CEOs will need to use a wider lens when assessing would-be competitors—and would-be partners. Indeed, in an ecosystem environment, today’s competitor may turn out to be tomorrow’s partner or “frenemy.” Failure to grasp this may cause you to miss opportunities and underestimate threats.

Platforms are fast rewiring even physical markets, in the process redefining how traditional companies need to respond. Look around and you will see the new digital structures toppling industry barriers, opening avenues for cross-functional products and services, and mashing up previously segregated markets. Gaining vast scale by placing customers at the center of their digital activity, ecosystem leaders such as Apple and Tencent have captured value that was difficult to imagine a decade ago.

It’s discouraging to see that to date, few established companies have opted to play these powerful new competitors’ game. Our research shows that only 3% of incumbents have adopted an offensive platform strategy. Ignoring ecosystems won’t make them go away, but it may lead to more of your customers doing so.

Martin Hirt is a senior partner in our Greater China office, co-leader of our Strategy and Corporate Finance Practice, and co-author of Strategy Beyond the Hockey Stick with Sven Smit and Chris Bradley.

This article originally appeared on LinkedIn.

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