Sharing Value for Ecosystem Success

What do you call an ecosystem in which you always see your company as the central actor?

An ego-system. This is how we end up with labels such as the “Google ecosystem,” the “Facebook ecosystem,” the “insert-your-name-here ecosystem.” These labels seem impressive at the get-go, but they undermine an important truth: Ecosystem strategy is alignment strategy.

Defining ecosystems around companies blinds everyone involved to alignment hurdles and limits their ability to craft appropriate strategies. The presumption of centrality makes it harder to establish the relationships needed to achieve their goals: It’s harder for ecosystem leaders to create strategies that attract followers, and harder for ecosystem partners to know which leaders to follow and where to place their bets.

Apple offers a stark example. The most valuable company in the world has been enormously successful in extending the mobile data device ecosystem it leads — iPod to iPhone to iPad to Apple Watch, encircled by its App Store and iOS platforms. But it has been shockingly disappointing in its efforts to expand into new businesses that require the construction of new ecosystems. Apple’s failures to deliver on ambitious promises — that health care would be the company’s “greatest contribution to mankind”; that the HomePod would “reinvent home audio”; that its classroom education platform would “amplify learning and creativity in a way that only Apple can” — are concealed by the profits gushing from its core ecosystem, but they are failures nonetheless.1 The consequences of these failures are borne not only by Apple, but also by all the companies that joined as complementors in these efforts.

If successfully aligning the partners and other participants in new ecosystems is challenging to a company as sophisticated as Apple, a giant at the height of its power, then (1) no would-be market leader should be deluded into thinking that its success in one ecosystem will naturally translate to leadership elsewhere, and (2) no would-be complementor should assume that following established leaders into new domains is a safe bet.

How can all ecosystem players do better? They can anchor their notion of ecosystems in the value propositions that are being pursued, not in corporate identity. This shift in mindset supports the formulation and execution of more successful strategies for leadership (not always the most advantageous role to play) and followership (far more common, but too often neglected) in an ecosystem world.

The Hierarchy of Ecosystem Winners

Ecosystems defined around the roles, positions, and flows across the partners that create a value proposition2 will each require a unique alignment strategy. Apple, for example, participates in health, education, and smart-home ecosystems. Even though its participation in each is anchored in many of the same elements (iPhone, iOS, App Store), its role and position within the coalition of critical partners that cocreate these ecosystems is different in each case: There is no monolithic “Apple ecosystem.” This means that Apple and its partners should not expect its leadership in one ecosystem to automatically extend to leadership in another.

It almost always makes sense for companies to strive for leadership within their industries — winning that position brings great profit and pride. But ecosystems present a different hierarchy: In a successful ecosystem, there are no losers — only partners that win in different ways. In contrast, in an unsuccessful ecosystem, there are only losers. Failing at leadership in an ecosystem is failing at value creation. Although aiming for but falling short of a “first place” leadership position in an industry often leaves companies better for having made the effort, there’s little consolation for making an unsuccessful, “last place” effort in an ecosystem. You have simply failed. Here’s how the winners — and losers — typically place:

First place: At the top are leaders of successful ecosystems. No surprise there. These companies have managed to align their partners in a mutually agreeable, coherent set of positions. Their partners accept the guidance and guardrails that govern the collaboration. The leader makes the early investment in time and resources to achieve this alignment and usually is rewarded with an outsize share of overall gains.

Second place: The followers in successful ecosystems are contributors to and beneficiaries of the ability to manifest the value proposition. The absolute size of followers’ gains is often (though not always) smaller than that of the ecosystem leader. But the investments that followers need to make are smaller as well. This means that the relative returns to followers in successful ecosystems can be attractive indeed.

Third place: Third place in the hierarchy goes to followers in unsuccessful ecosystems. Followers lose when an ecosystem fails, but because their antes are relatively small, their losses are small too.

Last place: The biggest losers are the leaders of unsuccessful ecosystems. These are the companies that invest the most upfront — in money, time, bandwidth, and prestige. When the ecosystem fails to converge, it is these companies that face the biggest write-downs.

The Clash of Ego-Systems: Mobile Payments in the United States

Apple’s ongoing efforts in mobile payments offer a clarifying study in the limits of ecosystem leadership. Phone-enabled mobile payments were supposed to revolutionize in-person transactions by eliminating the need for cash and credit cards, but this has failed to happen in the U.S., despite big investments. Since 2010, tech giants, dominant retailers, and telecom leaders have all bet big on proximity mobile payments. In 2014, Apple placed its bet with great fanfare. “Apple Pay will forever change the way all of us buy things,” announced CEO Tim Cook. But it took until 2019 for Apple Pay to edge out the Starbucks app for the top spot in U.S. mobile payment transactions. This is failure: If you’re barely beating coffee, you haven’t made a dent.

Why hasn’t Apple (or any of the big players) been able to lead a successful mobile payment ecosystem? Because so many of them have been so intent on leading it themselves, falling prey to the ego-system trap.

Success in this ecosystem depends on collaboration among four types of actors: smartphone players, banks, retailers, and mobile operators, each of which sees a clear win in the transition to mobile payments. (This is a simplification to avoid getting bogged down in technical, legal, and regulatory details.) Apple, with its undisputed leadership of the iPhone ecosystem, ocean of users, and direct control of its App Store, saw mobile payments as an important ecosystem extension. From Apple’s perspective, the other three actors were already established as followers: Banks and retailers were willingly submitting their apps for inspection and approval as required for distribution via the App Store, and phone operators were happy sellers of iPhones and service plans.

Shifting to a new value proposition, however, can trigger new tensions among partners. While there is always some strain regarding terms of exchange (developers objecting to the level of App Store commissions, for example), realigning partners in pursuit of a new value proposition can give rise to more fundamental disagreements about roles and positions, which can stymie value creation.

Apple’s entry into payment processing raised serious concerns for banks. It was one thing to offer web-like services through a phone app; it was quite another to have a phone-maker move into their part of the value stream. Apple overcame this hesitancy with a masterful alignment strategy: It required users to choose one default card — the “top card” — for all Apple Pay transactions. The gambit was clear: Banks that were not immediately ready to support Apple Pay would lose the chance to be a user’s go-to card and the fees associated with their payments. By February 2015, more than 2,000 banks were participating.

Unfortunately, successfully aligning just one actor does not secure an ecosystem — not for the leader, and not for the followers. The mobile operators, who had been charging for mobile interactions for longer than anyone, had their own view. AT&T, Verizon, and T-Mobile, the three dominant operators in the U.S., had launched their own mobile payment initiatives as early as 2010 and had already invested hundreds of millions of dollars based on the assumption that handset-makers would be interchangeable, commoditized followers.

The largest retailers in the United States had yet another perspective as they joined together to create the Merchant Customer Exchange to lead the ecosystem. For them, mobile payments represented an opportunity to reset unfairly high credit card transaction fees. Moreover, tying payments to smartphones presented tantalizing opportunities to collect the consumer data needed for better promotional targeting, loyalty programs, and inventory forecasting.

What mattered was not whether the solutions pursued by mobile operators and retailers were better technologies or better propositions to consumers. (They were neither and would be shut down within a few years.) What mattered was that so many of the critical partners needed for Apple Pay to succeed saw themselves as anything but followers in this new ecosystem.

The use of mobile payments in the U.S. did rise during the COVID-19 crisis, but it was the pandemic that drove adoption. Even with this once-in-a-lifetime spur, the dollar value of transactions remains far below those of credit cards, and the technology is very far from meeting the promise of “forever changing the way we buy things.” At some point, mobile payments may come to dominate transactions in the U.S. If and when they do, two things will necessarily be true: First, alignment among the actors finally will have been achieved; and second, this point of success will have been reached with incredible inefficiency and long after the failure to meet the original expectations of leaders and followers alike.

The lesson: Presuming leadership creates a false sense of alignment. It also limits the ways in which ecosystem leaders and followers can envision success.

Strategies for Ecosystem Leaders

Ecosystems are unsuccessful until they succeed, but they fail only when would-be leaders finally give up. This is the painful manifestation of the ego-system trap: You can back yourself as a leadership candidate for as long as you are willing to fund the campaign, no matter whether your required partners view your candidacy as unlikely or unreasonable. The only limit to companies throwing good money after bad is the balance of their bank accounts or the patience of their investors. These two constraints are softest for companies whose accounts are replenished by torrents of cash generated in their core businesses, which is why we see the same set of usual suspects involving themselves in so many ecosystems and, at the same time, making so little progress. There are steps leaders and followers can take to increase the odds of a successful ecosystem strategy.

Evaluate your leadership claim. A key to any company’s ecosystem strategy is identifying when it’s worthwhile to compete for leadership and when followership is advisable. The choice depends on the company and the context.

Successful ecosystem leadership, then, depends on having a compelling answer to one key question: Will your partners agree that they are better off as followers under your leadership than they would be contending for leadership themselves?

A clear “yes” is an indicator that you have a defensible — though not guaranteed — claim for leadership. A “no” is a warning sign that your ambition may be unfounded and that you risk ending up at the bottom of the hierarchy of winners. Looking for where these answers shift to “no” and “maybe” is the key to identifying the boundaries of your ecosystem, your ecosystem role, and your choice of partners.

In the case of new partners, leaders need to guard against overconfidence that is founded in a shared excitement around the value proposition. The stumbling block here is rarely the merit of the effort, but rather the fundamental debate regarding who will adjust to whom. Who will set the pace, direction, and rules of the ecosystem? If everybody involved thinks the answer is “me,” we can predict paralysis.

With existing partners, overconfidence may stem from expectations based on prior ecosystem roles. The leadership claim that Apple established with the iPhone gave it the legitimacy to dictate terms in mobile payments, but only up to a point. As the proposition shifted from connected convenience to financial operations — activities closer to the core of its partners’ businesses — the answer to the leadership question shifted dramatically.

Foster followership. The ecosystem leader’s job is to drive alignment. What matters is not just what you want to do with others, but what others are willing to do with you. Unlike in the U.S., mobile payments have been transformative in China. The comparison is instructive, because the difference is not just in the strength of the existing alternative (China did not have an established system of credit card payments) but in the approach taken by the successful leaders to align the ecosystem. Despite China being more of a blank slate, the challenge of ecosystem alignment there was just as real as in the U.S. In China, however, the mobile payment proposition wasn’t led by handset-makers, banks, or traditional retailers. Rather, it was Alibaba (the established leader in e-commerce) and Tencent (the established leader in messaging) that led the way in their own parallel ecosystem construction journeys.

Starting from very different initial positions, both companies pursued a strategy of sequential alignment — staged expansion — through which the value proposition and the requisite partners were brought on board in a logical order over time. For Alibaba, customers looking for alternatives to cash on delivery led to Alipay — a digital wallet funded with money deposited in a separate account that enabled a trusted way to pay for purchases. For Tencent, it was a peer-to-peer method to transfer money between users of its WeChat Pay messaging system. By enabling access to a growing number of third-party online merchants and services, it gradually entered into the realm of mobile payments in the physical world. Tencent achieved this through the use of app-generated QR codes that could be scanned with the counterparty’s smartphone camera — an approach that did not require significant investment on the part of the merchant.

Positive progress with partners in each stage provided the strategic rationale for new partners to agree to followership. While the litmus-test question posed earlier must be answered in the affirmative, getting to “yes” step by step can be a much more productive path than trying to align the entire system all at once.

To be confident in your leadership as you move into a new space, you must be confident that followers will value your leadership more than their own candidacy for the role.

But what if you are not?

Wise ecosystem innovators will always view the full set of choices in the hierarchy of winners before committing to a role. They know that having a great idea and the right resources is a start, not an end. If you cannot align others around your leadership, you can always walk away to pursue another opportunity. But better than simply walking away when you cannot lead is finding a way to fit your offer within someone else’s vision — thinking of followership as a role that can be shaped and a victory to be won — and developing a strategy to pursue it successfully.

Strategies for Smart Followership

Followership is no less strategic than leadership, but its rules are different. In a nascent ecosystem, it is the followers that hold the power to determine the leader. Once the leader is established and the system is secure, however, the power of followers can wane. Smart followers will be thoughtful about this window of influence — how it opens and how it closes. They will also know that roles are not permanent and recognize that they hold the power to change leaders and, potentially, seize the leadership mantle themselves. Understanding these implications is the difference between smart and naive followership. There are two key considerations when choosing followership.

Pick the leader that is right for you. Smart followers in an emerging ecosystem hold a unique power: They choose, proactively, to support the plan of a would-be leader. They recognize that the value of their endorsement gives them far more influence than companies that sit on the sidelines waiting for uncertainty to be resolved before joining.

Smart followers create momentum behind a given leader. The realpolitik is an exchange of power for influence, which means that smart followers pick their leadership candidate with care and think carefully about what they want in return.

If you choose to be a follower, first insist on understanding the way in which the leader seeks to construct the ecosystem’s value proposition. How is the leader defining value? How does it envision your contribution to the proposition? Is this consistent with your own vision and strategy? Although an ecosystem is a collaboration, every business defines its own ecosystem strategy, which encompasses a view on structure, roles, and risks. Across participants, these strategies can range from consistent to contradictory. The greater the consistency in strategy among the relevant actors, the higher the likelihood that their actions will converge and succeed.

Second, if the leadership claim makes sense to you, ask yourself whether it will make as much sense to other needed participants. Recall the banks in the Apple Pay case — it is not enough that one actor is willing to follow if other critical partners are not. Who else is in the early coalition, and how will you get along?

Third, before committing precious resources and credibility to a leader, smart followers seek clarity on the leader’s goals and motives. Does the leader win when you win? Do you win when the leader wins? The answers should be “yes” and “yes.”

The e-book ecosystem offers a good example. Amazon and Apple offered very different choices and constraints to book publishers as they sought to attract them to their respective platforms. Whereas Amazon insisted on setting e-book prices (initially at $9.99 per book, which the publishers thought was much too low), Apple was very willing to let the publishers set prices themselves. Publishers loved the pricing power enabled by Apple. What the publishers missed, of course, is that the driver of Apple’s profits was selling hardware; racking up zero book sales would hardly matter to Apple, as long as people bought iPads. Amazon’s profits, on the other hand, were based in content sales; for it, hardware was a loss leader. Although publishers and Amazon disagreed about pricing, there was perfect alignment in wanting to drive book-purchase volume. And indeed, sales of books through Apple’s digital bookstore are a rounding error relative to Amazon’s sales numbers.

Shape the larger game. Smart followers will consider how they want to interact not just with the leader but with other followers as well. This is where the smartest followers make their best moves — not in negotiating against the leader, but in shaping the rules for other followers. Nowhere is the contrast starker than in the case of electronic health records (EHRs), which powered the promise of error prevention, process efficiency, and the elimination of redundant tests in the U.S. health care system. For 20 years, the IT industry had lobbied to keep the U.S. government out of EHR discussions, assuming that regulation would be bad for business. But after 20 years of failing to persuade health care providers to purchase the technology, the IT champions came to the collective realization that they were in no position to lead. For health systems, the main barrier to adoption was cost (these were expensive IT systems that would require big upfront payments and annual service fees) and opposition by doctors (who were rightly wary of the data-entry burden that these systems would impose on them).

IT giants Cerner and Epic led the charge to become followers, successfully lobbying for the U.S. government to take the lead in aligning this complex ecosystem. With the 2009 passage of the Health Information Technology for Economic and Clinical Health Act, the government officially took charge: It addressed the goals of IT vendors by penalizing providers that did not adopt EHRs, and it addressed the goals of providers by subsidizing the adoption of EHRs. In all, $27 billion was allocated in the form of increased Medicare and Medicaid payments for “meaningful use of certified EHR systems.”3 In 2015, these subsidy carrots would turn into sticks when providers that had not adopted EHRs “meaningfully” (consistently updating digital records with diagnoses, monitoring drug interactions, and ordering prescriptions) would see their payments cut. No follower is thrilled when their behavior is constrained or micromanaged, but although meaningful use was distasteful to hospitals, it was not so onerous as to be a deal breaker. After all, there were 27 billion reasons for them to find common ground.

Here is the crux: Hospitals agreed to follow, and in return they demanded financial compensation, which they negotiated with the leader. This is a naive approach to followership. The IT companies played a smarter game. They not only negotiated with the leader for the financial assistance that would help their sales; they also negotiated for the inclusion of meaningful use — an imposition not on the leader, but on the behavior of other followers. They shaped the long-term governance of the ecosystem when the rules were still emerging.

In the window when alignment and agreement were still being negotiated, providers could have made a reciprocal set of demands — insisting on interoperability standards across EHR systems, for example. The IT vendors were against this idea for the obvious reason that it would increase both development costs and competition among vendors. But this would likely not have been a deal breaker; they, too, had a strong financial incentive to agree. The providers did not insist, however — at least not until after the deal was done and the act was passed. By that time, it was too late. The rules were set, the alignment structure was in place, and it would be another decade before a serious move toward interoperability would have another chance to gain traction.

This is the followers’ version of the ego-system trap: acting as though the game is played only between themselves and the leader, rather than positioning broadly with regard to the other players in the ecosystem. Just as no one will stop you from throwing good money after bad in the pursuit of futile leadership, no one will force you to exercise smart followership while the window for leverage is still open.

Succeeding in ecosystems requires understanding and strategizing roles and structure not just for yourself, but also for those partners on whom your success depends. More broadly, strategy in the context of ecosystems must pay at least as much attention to allies as it does to rivals (something I discuss in more detail in Winning the Right Game: How to Disrupt, Defend, and Deliver in a Changing World).

The message for would-be leaders is that followership must be earned and then re-earned. Enduring leadership depends on being watchful, being thankful, taking nothing for granted, and staying humble. Followers, on the other hand, should think broadly and leverage the power of their role in allowing the leader to achieve alignment, with the awareness that power fades over time.
For both leaders and followers, avoiding the ego-system trap is easier said than done, but it’s worth the effort.