Ecosystem

Platform and Ecosystem Transitions: Value Creation in a Digital Age

2.0 Literature Review

In a platform business model, an organization moves from offering a product to creating an ecosystem for those interactions. This shift is critical to understand how platforms work, as often those don't require any capital or physical inventory.

The classic example is Uber having among the widest variety of vehicles around the globe, yet owning none of them

Figure 2.0 Platform Business Models in a Nutshell (credit FourWeek MBA)

Digitalization fundamentally changes how we live from the old traditional ways we are used to. Digitalization involves everything described as social-technical phenomena and processes of adopting and using digital technologies in broader individual, organizational, and societal contexts (Legner et al., 2017, p. 301). At the forefront of this development are organizations that effectively manage the utilization of this trend. Organizations such as Amazon, Google, Facebook, Tencent etc, These organizations make the most of their money selling their customers. They claimed to have transformed themselves but never entirely left their original business (Cortada 2019). Besides the well-known giants of the digital world, other organizations successfully embrace digitalization and transform themselves (Haverans 2019). For example, Uber and Lyft changed the taxi industry in a way never imagined in the past two to three decades; Subway ultimately plans to remodel their self-service kiosk of the future and works with over 150 technology professionals to improve the company's mobile app. Capital One was the first bank to integrate Amazon's Alexa into their financial transaction system, and its mobile banking app was among the first to support Apple's TouchID. Airbnb transformed the entire hotel industry and has many homes across the globe without owning one of them. Wal-Mart launched an application to enable its programmers to switch between different cloud providers. Domino's Pizza integrated a variety of ways to place orders, such as Twitter or text. These examples give an idea about the impact of digital transformation endeavors that many organizations undertake to adopt digital technology, and therefore digitalize.

Transitioning platforms to build an ecosystem for creating value is a transformation that is a prosumer business-centric perspective on strategies that focus on the change of products, processes, and organizational aspects due to new technologies (Matt et al., 2015). It consists of the elements use of technologies which is the core engine of transformation, changes in value creation as the new consumer demand is ever-changing, structural changes to meet this ever-dynamic consumer demand, and financial aspects (Matt et al. 2015). The central elements requiring digital transformation are digital technologies.

2.1 The importance of business model design

Transitioning and digitalization ecosystem platforms require strategic analysis to understand the organization's environment and competitive landscape to formulate informed business decisions that would help plan for the structure of the organization and its long-term direction.

Planning strategically is essential to experiment with business model design and assess the fit with the business's long-term vision. At the core of a company, transformation aims to build a business model that would create a sustainable value chain that can unlock value for several players in a market, industry, or niche. Therefore, this value chain will start from a value proposition, a promise you make to the key players and partners in that market, industry, or niche, depending on where you start.

For instance, when PayPal started, it didn't look to dominate the whole market. It started from a niche, as Peter Thiel put it in his book, Zero to One. The most successful companies make the core progression first to dominate a specific place and then scale to adjacent markets part of their founding narrative. Indeed, PayPal began identifying its most valuable partner, what at the time they called ͏power user. That was a choice driven by its business model design.

Therefore, instead of generically offering a service for everyone, PayPal focused on acquiring and attracting as many power users as possible. Those power users mainly were on another platform that had already scaled up like eBay. Thus, PayPal focused all its effort on acquiring those power users from eBay fast. Only after PayPal had drafted, tested, and validated a clear value proposition for a small yet critical group of power users could it move on to take larger and larger segments of that market.

Tim Brown, Executive Chair of IDEO, defined design thinking as ͏a human-centered approach to innovation that draws from the designer's toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success. Therefore, desirability, feasibility, and viability are balanced to solve critical problems.

In the last couple of years, novel information technologies raise expectations to revolutionize our societal system as we know it. "Artificial Intelligence" is expected to replace human jobs (Leetaru 2016). "Blockchain" is supposed to eliminate inefficient intermediaries (Peters and Panayi 2016; Schlatt et al. 2016), and the "Internet-of-things" is anticipated to generate interoperability across geographically distributed users to create value for customers (McKinsey & Company 2016). Unsurprisingly, in the current era of digitalization and transformation, the focus for organizations is on exploiting technologies to enable new functionalities and open promising business opportunities (Tilson et al., 2010). As a result, adopting these technologies can become a crucial differentiator against competitors and a critical factor for financial sustainability (Chandy and Tellis 2000; Fagerberg 2005; Teece 2010).

Business platforms ecosystems in hand with digitalization or digital transformation, in the last decade, has facilitated massive improvements in prosumers interactions, data and information gathering, communication, and connectivity technologies, which resulted in new functionalities and a new way of life. This process also changed Information Technology (IT) (Bharadwaj et al. 2013, p. 472). Therefore, the way organizations utilize their IT has fundamentally changed. IT is no longer a business process, or a platform as most software and technology companies describe it, that enables organizations to carry out work across boundaries (e.g., Banker et al. 2006; Bharadwaj et al. 2013; Ettlie and Pavlou 2006; Kohli and Grover 2008; Rai et al. 2012; Sambamurthy et al. 2003; Straub and Watson 2001; Subramaniam and Venkatraman 2001; Tanriverdi and Venkatraman 2005; Wheeler 2002). But much more to that, IT enables "different forms of dynamic capabilities suitable for turbulent environments" (Bharadwaj et al. 2013, p. 472; Pavlou and El Sawy 2006, 2010), transforms the structure of social relationships for both users and organizations (e.g., Susarla et al. 2012), and increasingly tangles products and services with their underlying IT infrastructure (e.g., El Sawy 2003; Orlikowski 2010). These three characteristics facilitate the interaction between organizations and users in the digital world, which results in digital platforms of various kinds. Unsurprisingly, such platforms are the centerpiece of many of today's digital giants (Gawer 2014) and are now found everywhere in today's world (Parker et al. 2016; Tiwana 2014).

Platform ecosystems are dynamic and continuously evolving. The evolution of digital platforms changed many phenomena in the Information Technology environment (de Reuver et al. 2018). User interaction with organizations changed due to online communities of consumers and the way they connect (Spagnoletti et al., 2015). Inter-organizational relationships for the development of information systems changed due to app development and platform provision and their interactions with one another (Eaton et al. 2015; Ghazawneh and Henfridsson 2013; Tiwana et al. 2010). The architecture of organizations changed due to modular development instead of monolithic systems (Tiwana et al., 2010). Digital platforms are defined as the extensible codebase of software- or hardware-based systems that provide core functionality (Baldwin and Woodard 2009; Eisenmann et al. 2006) and usually serve as places where at least two parties interact. However, since platforms are not a new phenomenon (Clark 1985; Katz and Shapiro 1994), they differ in terms of various characteristics such as homogenization (Kallinikos et al. 2013; Yoo et al. 2010) and standardization (Yoo et al. 2010). Organizations work together as partners or compete for customers (Hannah and Eisenhardt 2018). Thus, organizations participate in platform-based ecosystems to create value from the participation. The creation of value is either through stand-alone activities (e.g., selling products, offering services) or cooperating with other ecosystem participants. The cooperative creation of value with other organizations or users in the platform-based ecosystem coined the term value co-creation (Constantinides et al. 2018; Song et al. 2018).

Resulting from the emergence of ecosystems, competition increasingly shifted towards them. Adner (2017) also distinguishes two perspectives on ecosystems: The ecosystem as affiliation, which views "ecosystems as communities of associated actors defined by their network and platform affiliations," and ecosystems as structure, "which sees ecosystems as configurations

of activity defined by a value proposition" (Adner 2017, p. 40). This doctoral thesis focuses on the view of ecosystems as affiliation. In the following, Sections 2.2 and 2.3 resumes are describing the participants of ecosystems and explaining their objective for participate

2.2 Platform-Based Ecosystems

Within platform-based ecosystems, different participants interact with each other. Such participants can be either organization (organizational roles) or users (user roles). Figure 2.2.1 below summarizes the connections amongst participants in a platform-based ecosystem.

Participants in a platform-based ecosystem

User roles

1. Actual customer

1. Potential customer

Organizational roles

1. Ecosystem leader

1. Partners

1. Competitor

Organizational roles

1. Ecosystem leader

1. Partners

1. Competitor

Figure 2.2.1 Structural visualization of typical participants in a platform-based ecosystem (Drasch, 2019).

2.3 Ecosystem Leader

Early research on platform-based ecosystems identified organizational "leaders" (Gawer and Cusumano 2002) or "keystone firms" (Iansiti and Levien 2004) such as Google, Apple, and Facebook (Gawer 2014). The leader is the coordinator and directs other organizations and their roles within the ecosystem. Ecosystem leaders manage the ecosystem and can dictate the ecosystem governance and the direction they want to steer the platform and have the power to grant or deny access, for example, by switching off or changing application programming interfaces, by charging fees, or by allowing the utilization of data (Tiwana et al. 2010). In many cases, such as Facebook, Google, or Apple, the value of being the ecosystem leader is the direct access to the data and the resulting opportunities.

Ecosystem leaders must make complex strategic decisions about the other organizations in the ecosystem, which can be partners or competitors (Gawer and Cusumano 2014). For example, if an ecosystem leader develops novel technological approaches that target products or services of other organizations, the extension of the scope may eliminate these organizations and thus, eliminates their participation and innovation capabilities from the ecosystem (Gawer and Cusumano 2014). Consequently, integrating other organizations in the ecosystem fails due to too much competition and eventually can fail in the ecosystem (Ozcan and Santos 2015). In contrast, if ecosystem leaders cooperate too much, others overtake their market position or even absorb others' value proposition (Hannah and Eisenhardt 2018). The ecosystem leader's perspective requires the management's awareness of the decisions' interdependencies (Ceccagnoli et al., 2011).

Cusumano and Gawer (2002) identify four levers of ecosystem leadership: Scope determines the amount of internal innovation and external complementation. Product technology is the architecture behind the product or service, enabling complementation or replication. Determination of relationship is the collaborative or cooperative relationship with

2.3.1 Competitors

Differentiating between competitors and partners is not apparent. For example, Apple, Google, Microsoft started to integrate their central document processing to make it difficult to tell who is partnering with who .or who is competing with who.

Competitors are organizations that target the value proposition and aim to access market potential. The task for the ecosystem in many cases is to exclude competitors from the platform. In platform-based ecosystems, strong network effects and high switching costs often secure ecosystem leaders and their partners from the entry of competitors (Eisenmann et al., 2011; Farrell and Saloner 1984; Katz and Shapiro 1985). For this purpose, competitors propose ecosystems with superior value propositions, replacing existing ones and building on the new competitors' strategy, so the cycle continues (Evans and Schmalensee 2002). This often leads to winner-takes-all. In this context, organizations bundle their functionality to an existing ecosystem leader to leverage shared user relationships and standard components. However, in cases where ecosystems are settled, and existing organizations aligned themselves too much, the platform even benefits from competitors. Therefore, the proposed value for participants increases.

2.3.2 Partners

Partners can be described as organizations participating in the platform-based ecosystem for cooperation which is usually a win-win for both sides or as many sides that are in partnership. They create value by providing products or services complementary to other goods and services within the ecosystem. Overall, partners can increase their operational performance and reach through participation in an ecosystem (Ceccagnoli et al., 2011). As a result, organizations have an incentive to become partners and to participate in an ecosystem.

In many cases, partners identify unique niche value propositions complementing other organizations' products or services. Consequentially, partners rely on the organization's success in providing the product or service ("dance with the elephant," Cusumano and Gawer 2002, p. 54). Before entering such ecosystems, partners consider how actively the ecosystem leader collaborates with other organizations, how open the ecosystem's design is, and how likely the other organizations are to compete (Cusumano and Gawer 2002). As a result, partners need to be alert on product plans, novel innovations and quickly react accordingly (Cusumano and Gawer 2002).

Partners with protected intellectual property rights can benefit from greater returns, and partners with unprotected intellectual property rights need to be very cautious when entering ecosystems (Ceccagnoli et al., 2011). The ecosystem leader indirectly benefits from partners' intellectual property rights because strong partners nurture the platform-based ecosystem by contributing substantial innovations (Ceccagnoli et al., 2011). This leads to additional customers using the platform-based ecosystem, which encourages more organizations to become partners (Ceccagnoli et al., 2011). Hence, from an ecosystem perspective, innovative partners are welcome since the ecosystem benefits from their participation and more likely to participate since they are accepted by ecosystem organizations (Huang et al., 2009).

For partner organizations, the benefits from collaborating can be manifold: Organizations share information on specific markets, applications, R&D plans, roadmaps, customize products, develop joint products, realize joint marketing, and set common standards and licenses (Kapoor 2014). By joining the platforms, partners avoid these costs and even indicate compatibility with the other products and media within the ecosystem (Ceccagnoli et al., 2011). Partners can work together by integrating their products and services through application programming interfaces or synchronizing product development plans. Generally, the rise of platform-based ecosystems facilitates novel forms of inter-organizational cooperation. In many cases, this results in organizations adjusting each other's products and processes according to their ecosystem.

Applications, such as Word, Excel, and PowerPoint. However, these organizations are not partners but live with the mutual integration of single applications into each other's ecosystems. This is because all the three mentioned organizations have interoperating users who do not want to restrict themselves to one ecosystem.

2.3.3 Users

Users refer to existing and potential customers of organizations participating in the ecosystem. Users in ecosystems vary and differentiate in the frequency, volume, type, and quality of digital content they produce and consume (Trusov et al., 2010). In the academic discourse, users are categorized as passive or active depending on their activities (Burnett 2000; Preece et al. 2004). Active users are interested in engaging in the ecosystem by creating and sharing information, participating in activities, or helping others (Casaló et al., 2007). Passive users only browse online groups and consume content without participating in the community or activities (Burnett 2000; Preece et al. 2004).

Interaction between users and organizations within platform-based ecosystems can be manifold. In this term, this doctoral thesis does not provide an exhaustive overview of all possible interactions. To enable and utilize the cooperation potential between organizations and users effectively, incentives for both are necessary. Therefore, certain aspects are essential: It is important to have incentives in place – in some cases, these can be intangible incentives (e.g., recognition, opinion leadership), while in other cases, economic incentives are necessary (Sawhney et al. 2005). The motivations for both organizations and users need to be well-designed, which can have a remarkable impact on the outcome of the interaction (Toubia 2006). It is essential to have rules in place regarding intellectual property rights so that the organization can use the exchange results (e.g., innovative ideas) (Sawhney et al., 2005).

2.4 The Anatomy of a Platform Business

A platform ultimately enables value creation by connecting with users to facilitate transactions. At the same time, a traditional business creates value by manufacturing products or services. The experience defers that the consumers are connected and have the flexibility of creating their products, hence why they are called prosumers.

The core transaction is transforming from traditional business transactions to an interactive engagement or connection with the consumers— the way it manufactures value for its users. It is the process that turns potential relationships into transactions and creates a seamless experience and value for the prosumers. Getting the core transaction right is the most important part of platform design. The platform business will need its users to repeat this process repeatedly to generate and exchange value, making the platform ecosystem very dynamic and extensively scalable.

Figure 2.4.1 The four steps of the core transaction (Moazed, 2021)

Although a platform enables the core transaction, it doesn't directly control its users' behaviors. The challenge in the platform business is a unique one, and that is how to get potentially millions of people to behave the way you want them to.

Figure 2.4.2 The four functions of the platform business model (Moazed, 2021)

For that to be achieved, first, you must attract users to join. You aid them by matching them together, providing the technology to facilitate the transaction, and establishing the rules that govern the network to build trust and maintain quality. These are the four core functions of a platform:

1. Building desired audience

1. Finding ways to matchmake the audience to form a network of people

1. Providing core tools and services to keep the audience engaged, and

1. Setting rules and standards to guide interactions.