Ecosystems and new work methods disrupt the economic order

Abstract circuit city background. Urban technology concept.

Sometimes you just have to say: the disruption has already happened. Even as people are still contemplating the potential for disruption, events take over. That’s the case with two big current events. The first is the future of food security. The second is the eclipse of US economic power.

The latter is still reversible but requires a rethink of how we go about creating and distributing wealth and what we permit to happen in markets. It means agonising further on the centralisation of economic power. Here’s the backstory.

Many of the headlines covering business transformation and business success still focus today on Facebook, Apple, Amazon and Google. The four horsemen of the digital economy. Their combined market capitalisation reaches into the trillions of dollars. Yet the observation of their dominance was already being made in 2010. Much has changed since then and the change emanates from China.

Chinese Internet giants are not just companies as we understand the idea of “an enterprise” or might read about in HBR.

Increasingly these companies resemble a hybrid. Yes, there is an enterprise, or usually a platform, at the core of much China-inspired economic activity. But each rising Chinese commercial power is really part of multiple ecosystems of interlocking companies.

The capacity to create ecosystems at the enterprise-level enables extraordinary, economic growth but it also means China is redefining the nature of enterprise, creating dynamic cartels that are different from conglomerates and different from Korean chaebol. With that, they are disrupting also the capabilities of management, key personnel, ways to work and ways to do business.

With US venture capital active across these ecosystems, and invested in some of China’s most exciting companies, there is little to fear here for the US financial industry. But as we saw, old industrial giant GE recently dropped from the Dow Jones Industrial. There is plenty to fear in the inability of many companies to update their thinking on how a company should be run, how it should scale, and how it should function in day to day work practices.

GE is instructive because for years, prior to former CEO Jeff Immelt’s departure, it was an advocate of a new consensus in American business: Companies need to be software driven and agile, they need to be decentralised and act like startups. Companies also needed to be platforms and so GE developed Ecomagination into a platform; Healthymagination and Predix (the industrial data platform).

All these ideas sound good in theory. But Immelt lost his job, GE slipped from the Dow, the company skipped a dividend and Fortune described recent earnings as a meltdown. Perhaps most significantly, GE is no longer a demonstration to US executives of how to run a business.

Contrast that with companies that are taking over the new industrial landscape.

As noted in an earlier Brink article, China’s DJI has achieved 85% share of the global consumer drones market forcing US companies to downsize in response. Were its eyes on changes in consumer markets, GE could and should have been a leader in drones.

In another area of the economy, IoT specialist IngDan is on course to be the platform of choice for IoT component manufacture around the world, having already launched 10,000 IoT projects.

GE sold its Appliances (the IoT used to be called the Internet of Appliances!) division in 2016 to China’s white goods manufacturer Haier.

Haier set about eliminating more than 12,000 middle managers and restructured the business into an ecosystem of small, nimble work units, “which can better respond to consumers’ demand,” Haier chairman Zhang Ruimin told the South China Morning Post in October 2017 as the company began to increase profits.

The Haier strategy is built around connectivity and data, hardly a vision of genius. However, it is ironic, and telling, that GE Appliances did not look upstream to changing market conditions (connected appliances, drones, other electrically powered vehicles) or focus its innovation capability on connectivity and data in appliances, places the startup mentality Immelt craved should have led to.

It focused instead on startup agility, building products iteratively (as is the consensus) in conjunction with existing customers and in the process overlooked new markets. Its software development processes became “agile” while the company was weighed down by middle management. It followed the new orthodoxy of US management thinking and it is losing.

Chinese advantage arises from the speed with which management go beyond the orthodoxy and create new thinking on the fly. In particular, at least for now, they focus on the business ecosystem.

Western companies focus on the idea of the platform at a time when platforms have become commodities even though they are at the forefront of technology. Platforms represent highly scaled, seamless transaction engines that take the friction out of business. But it is the ecosystem that makes platforms work.

There are essentially two types of ecosystem: those that cooperate at the inter-firm level (the classic case being Arm Holdings in mobile chip design) and those that focus on the customer environment (a classic case being Amazon). Chinese companies have the capacity for both.

An easy case study for people to understand customer facing ecosystems is Amazon Kindle. Kindle is successful not because Amazon has a great publishing platform. The platform is at best mediocre; for example, there is no capacity for intuitive page editing in Kindle’s product descriptions and Amazon’s pay-per-click marketing platform is a mystery to most users.

However, there is a huge ecosystem of people, small companies and gig economy assistants who help indie publishers to get Kindle right. The companies have emerged organically as a result of Amazon’s success and Kindle’s weaknesses. Amazon did not plan them. This is the nub of consumer facing ecosystems. They are very difficult to plan. Participants make no money from Amazon itself. Yet they are central to Kindle’s success.

The Chinese approach has been to focus on the enterprise-level ecosystem to capture consumer attention and spread it across multiple selling opportunities through interlocking ecosystems. Having created success, they are now also developing the consumer facing ecosystem too.

At the enterprise level, I can book a journey on Fliggy, buy travel insurance from Zhong An, book a taxi to the airport on Didi, or drive my own car with an AliOS powered map on the windscreen. I might also have a quick home delivered meal before going to the airport courtesy of Ele.me and pay everything with Alipay, earning 88 Membership loyalty points in the process.

This represents a step up in ease of use for consumers. But all these providers are owned or part owned by Alibaba, as is much of the cloud service that underpins them. The route to scale is much easier with such an ecosystem. And Alibaba has recently opened up 1500 APIs to facilitate more consumer-facing ecosystem participation.

Western companies are still stuck at the shall-we, shall we not become simple platforms with APIs. The answer is that most of them are too late to become platforms with complex ecosystems. There are four reasons for that:

  1. They do not understand the need for ecosystems of interlocking enterprises that can scale for markets of billions because they are focused on the platform; in any case antitrust legislation would prevent it.
  2. They cannot develop consumer-centered ecosystems that self-perpetuate outside the platform, because these are built on new relationship skill sets, something that only Amazon has attempted because it could turn a blind eye to profit.
  3. They struggle with the idea of pace. While some platforms update their systems dozens of times a month, very few are capable of launching two new products a week. It requires a new way to work that has not yet entered western business practice.
  4. They are blind to emerging market needs or changes in upstream value and the pace at which social attitudes and needs are changing. Without those insights western companies waste their time on delivering to old needs.

In all these cases Chinese companies have an advantage that is being welded each day into a new way of doing business. We are already disrupted. Western companies have lost the initiative and much (including regulatory, business practices, ways of working and ambition) now needs to change, at pace.