Competing in digital ecosystems

Mohan Subramaniam a,*, Bala Iyer b, Venkat Venkatraman c

aCarroll School of Management, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467,U.S.A.

bBabson College, 231 Forest Street, Babson Park, MA 02457, U.S.A.cQuestrom School of Business, 595 Commonwealth Avenue, Boston, MA 02215, U.S.A.

Business Horizons (2019) 62, 83—94

Available online at www.sciencedirect.com

ScienceDirectwww.elsevier.com/locate/bushor

KEYWORDSDigital ecosystems;Digital envelopes;Product-in-useinformation;Digital transformation

Abstract Digital technologies are revolutionizing traditional interdependenciesamong businesses. As a result, managers have begun to recognize their businessenvironments as digital ecosystems. For firms accustomed to framing their businessenvironments as industries, this represents a significant shift in perspective–—onethat requires an understanding of fresh strategic initiatives necessary to compete inthe digital era. In this article, we highlight what is new and different about digitalecosystems for firm strategy. We offer frameworks that explain how digital ecosys-tems provide firms with new sources of value and new avenues for growth. Two sets ofunderlying concepts govern these frameworks: (1) production and consumptionecosystems and (2) digital envelopes and product-in-use information. We introduceand elaborate upon these foundational concepts and highlight new strategic optionsfor firms to compete in digital ecosystems.# 2018 Kelley School of Business, Indiana University. Published by Elsevier Inc. Allrights reserved.

1. The power of digital transformation

Most managers now accept that firms competewithin ecosystems. They view the modern business

* Corresponding authorE-mail addresses: mohan.subramaniam@bc.edu (M. Subra-

maniam), biyer@babson.edu (B. Iyer), venkat@bu.edu (V. Ven-katraman)

https://doi.org/10.1016/j.bushor.2018.08.0130007-6813/# 2018 Kelley School of Business, Indiana University. Pu

environment as interdependent networks of enti-ties that connect with one another to create andcapture value (Williamson & De Meyer, 2012). Man-agers have also begun to accept the analogy withbiological ecosystems wherein multiple species anddiverse life forms are interdependent (Moore,1993). Digitization–—especially through the perva-siveness of smartphones, cloud connectivity, theinternet of things, 3-D printing, and other suchrelated developments–—has further compelled

blished by Elsevier Inc. All rights reserved.

1 The term “product” refers to both products and services inthis article.

84 M. Subramaniam et al.

managers to focus on ecosystems not just as ameans for improving efficiency, but also as a path-way for growth (Niden & Spriggs, 2016). The pur-pose of this article is to shed light on the distinctivefeatures of digital ecosystems and the new oppor-tunities they bring for firms.

Ecosystems signify interdependencies, networks,and partnerships (Kapoor & Lee, 2013; Zahra &Nambisan, 2012). These concepts are familiar tomost companies as they play a role in managinginterdependencies within the production process,supply chains, and distribution networks (Porter,1985). Firms also recognize how their competitiveactions and those of rivals are interdependent andappreciate the need to orchestrate them carefullyto maintain industry structure attractiveness(Brandenburger & Nalebuff, 1995). They have richexperience in managing partnerships withsuppliers–—or alliances with rivals–—and a robustcomprehension of the networks that shape theirvalue chains (Yu, Subramaniam, & Cannella, 2013).

Digital ecosystems, however, are powered bynew digital technologies that have transformedthe very nature and scope of traditional interde-pendencies. Digital ecosystems are far more expan-sive, with their reach and significance transcendingtraditional value chains and conventional industrystructures. Today’s music sector, for example,straddles computers, smartphones, social mediaplatforms, and software. Digital ecosystems arealso disrupting traditional industry structures on agrand scale and at an extraordinary pace (Gerth &Peppard, 2016). Apple, Google, and Samsung arerewriting the rules of delivering retail finance, adomain dominated for decades by Visa, MasterCard,and American Express. Healthcare’s future appearsto be at the intersection of traditional pharmaceu-ticals and technology titans such as Alphabet’sVerily unit and IBM’s Watson. In these new digitalecosystems, conventional products, services, andtheir underlying value chains are discovering un-precedented expansion in their scope and newopportunities to deliver value. Elevators, washingmachines, and turbines can inform consumers inadvance when they may break down; locomotivescan inform drivers about optimum speeds for maxi-mizing fuel efficiency; cars can find empty parkingspots; and doorbells can do double duty as homesecurity devices.

Some firms have already embraced thesechanges. Others, still accustomed to competingwithin traditional industry structures, need toadapt to new ecosystems driven by new digitaltechnologies. This effort is commonly referred toas digital transformation (Westerman & Bonnet,2015). While traditional firms must strive to retain

their long-established strengths, they must alsoabsorb new approaches to compete in a world ofdigital ecosystems. Our study focuses on this chal-lenge and offers an analysis of how firms couldmanage their digital transformation journey. Ourcore framework is anchored by a set of interrelatedconcepts: (1) production and consumption ecosys-tems and (2) digital envelopes and product-in-useinformation.1 Together, these concepts offer firms afresh lens via which to identify new value oppor-tunities offered by digitization and grasp novelapproaches to compete in digital ecosystems (seeFigure 1). We frame digital ecosystems as a combi-nation of production and consumption ecosystemspowered by digital envelopes and product-in-useinformation. Before we further clarify this defini-tion and present the transformative potential ofdigital ecosystems, we expand on its foundationalconcepts.

2. Production and consumptionecosystems

The contrast between traditional industrystructure-related interdependencies and the newinterdependencies driven by modern digital tech-nologies can best be seen in the distinction be-tween production and consumption ecosystems.Production ecosystems consist of interdependen-cies enmeshed in a value chain, such as producingand selling a product or delivering a service to acustomer. Conversely, consumption ecosystemsconsist of interdependencies that evolve after aproduct is sold or a service is offered and as it isbeing consumed.

For a conventional light bulb, for instance, pro-duction ecosystems entail interdependencies acrossvarious suppliers, manufacturing and assemblyplants, research and development (R&D), distrib-utors, and retailers. In contrast, its consumptionecosystems entail interdependencies that come in-to play after the bulb is sold, such as the availabilityof sockets, wiring, and electricity. Traditionally,most firms were designed to focus primarily on theirproduction ecosystems, as consumption ecosystemswere rarely relevant to their business models. Forexample, established bulb manufacturers such asGE and Philips have long been proficient at coordi-nating hundreds of suppliers, scores of integrated oroutsourced plants, and various distributors and

Figure 1. Framework for digital ecosystems

Competing in digital ecosystems 85

mass retailers such as Sears, Walmart, or HomeDepot. Engaging in the domains of sockets, wiring,or electricity understandably never made muchbusiness sense for them.

With modern digital technologies, however, theconventional bulb has evolved into a smart bulb.Equipped with sensors and Internet of Things (IoT)connectivity with a variety of other objects, thesmart bulb encounters a host of new interdepen-dencies when consumed; it connects to an expand-ing set of objects such as Amazon’s Echo, Google’sNest, smartphones, smart doorbells, and smartblinds. These new interdependencies generate sig-nificant new value to both consumers and producersthat goes far beyond a bulb’s conventional role inlighting. In homes, for instance, it can be part ofsecurity systems helping capture motion sensing oraiding live camera feeds. In warehouses, it cananalyze the movement of inventory, improving stor-age and logistical efficiency. On city streets, it cansense gunshots, alert police, and switch on camerafeeds for evidence in subsequent crime investiga-tions. Such new domains for value opportunitiesarise from the smart bulb’s expanding consumptionecosystem, as more and more objects, assets, sys-tems, and people become digitally connected. Ifbulb producers choose to engage in these emerging-consumption ecosystems, they can create newrevenue-generating services from bulbs.

The concept of consumption ecosystems can betraced to the well-known notion of complementar-ities (Lee, Venkatraman, Tanriverdi, & Iyer, 2010).Complementarities exist when any set of productsor services needs to be used in tandem and has littlevalue on its own (Dhebar, 2016). Toothbrushes andtoothpaste, DVDs and DVD players, or paper andprinters are classic examples. Consumers usuallybuy such products separately and combine themfor their own use. Traditionally, firms have provided

different kinds of options for consumers to makethose combinations. Some companies offer openstandards such as light bulbs and sockets; othersoffer proprietary standards such as razors and car-tridges (e.g., Gillette) or modular designs that en-able adding different complements at later times(such as printer ports on personal computers). Somemanufacturers co-own or co-brand the comple-ments such as toothbrushes and toothpaste (e.g.,Colgate), while others like bulbs and sockets do not.Given the cumbersomeness and tangible limitationsof combining physical objects beyond a manageablenumber, the scope of such complementarities in thepast was understandably small.

But with the rise of software, sensors, and con-nectivity, the scope and significance of such com-plementarities significantly expanded because ofthe ease with which consumers can connect differ-ent digital products (Gao & Iyer, 2006). For in-stance, the software driving the operatingsystem of a smartphone enables consumers toadd all kinds of software-driven apps. Thousandsof third-party developers can also complement asmartphone’s operating system software. Technol-ogies such as application program interfaces (APIs),which enable software programs to communicatewith one another, have further expanded this scopeexponentially (Iyer & Subramaniam, 2015a). Thewide-scale possibility of connecting a growingrange of complementary products–—and the optionsfor countless third-party entities to provide thecomplements–—has given rise to what we describeas consumption ecosystems (Iyer & Subramaniam,2015b). And with software becoming an integralpart of a growing number of products and otherphysical assets, the significance of consumptionecosystems for industrial-age firms is also steadilygrowing. The software operating system Sync inFord’s new connected cars, for instance, is open to

86 M. Subramaniam et al.

an estimated 18 million developers (Ranger, 2013);this unlocks a formidable consumption ecosystemfor auto manufacturers and enables them to offer avast range of apps and services consumers can mixand match to customize their cars after purchase.

Consumption ecosystems personify what is newabout business interdependencies; they either didnot exist or had narrow and insignificant scopebefore the modern developments in digital technol-ogies. Interdependencies in consumption ecosys-tems can allow for significantly more plug-and-play options. In contrast, production ecosystemsrepresent traditional industry structure-based in-terdependencies. These interdependencies amongsupplier, R&D, manufacturing, or distribution oper-ations tend to get hardwired into routines and arenot easy to reconfigure. Indeed, traditional reen-gineering efforts to make changes in productionecosystems are notoriously time-consuming, expen-sive, and risky (Dixon, Arnold, Heineke, Kim, &Mulligan, 1994).

That said, production ecosystems are also beingtransformed because of modern digital technolo-gies. Digitally embellished production ecosystemscan help firms significantly enhance the features oftraditional products and services. These enhance-ments, which we will subsequently elaborate on,largely reinforce their traditional market positions.Industrial-age firms must embrace new trends indigitization to reinforce their traditional interde-pendencies in the production ecosystem. More sig-nificantly, they must add to their focus newinterdependencies in the consumption ecosystemthat will open new areas and opportunities forgrowth.

In ignoring consumption ecosystems, traditionalfirms not only miss out on potential growth oppor-tunities but also open themselves to threats ofdisruption from digital players that thrive in theseecosystems. Google, Facebook, Apple, Amazon,and Uber have already begun influencing severalconsumer products’ consumption ecosystemsthrough their different software platforms. For in-stance, Google Home or Alexa may already bebetter positioned to control the light bulb’s con-sumption ecosystem in smart homes, connectingthe bulb to other devices such as alarm systemsor thermostats. As value shifts from the physicalbulb to new services within the consumption eco-systems of smart homes–—such as home security orenergy conservation–—traditional bulb producersfocused only on production ecosystems may faceerosion in their traditional value. It is in the interestof firms to find ways to not only revitalize theirproduction ecosystems but also engage in new con-sumption ecosystems. To understand how firms can

do so, it is important to recognize the second set ofconcepts we highlighted earlier: digital envelopesand product-in-use information.

3. Digital envelopes and product-in-use information

A digital envelope is a digital representation of aphysical product and its use. The digital repre-sentation comes through the collection, analysis,and deployment of real-time, product-in-useinformation on both the product’s operationand the environment in which it is used.Product-in-use information is collected via sen-sors that can observe the operation of everyindividual or group of assets. It is analyzedand deployed through software platforms andanalytical tools.

The more sophisticated and intricately posi-tioned the sensors are on any asset, the morerefined and powerful the collected information.A digital envelope of a car, such as a Tesla or ChevyBolt, senses detailed information on the car’s op-erations such as how its components like engine,exhaust, or brakes are working; it also gains real-time information on the car’s environment. Thisinformation is both contextive (e.g., informationon roads, maps, traffic or weather conditions)andcontextual as to specific location, how far anyother car is behind or in front, or in a side lanehelping the driver decide on how much to acceler-ate or when to change lanes (Pitt, Berthon, &Robson, 2011). This has allowed Tesla to collectdetailed product-in-use information on 5 billionmiles (Lambert, 2017), 1.3 billion of which arewhen cars are switched to self-driving mode (Hull,2016). GE has 66,000 individual jet engines(Powers, 2017), locomotive, and turbine assets,each of which has a unique digital envelope oper-ating on its software platform Predix. An analyticalmodel draws various inferences from the data usingadvanced techniques, big data, and self-learningartificial intelligence. The software platform feedsthese inferences back into the asset to repeat thecycle. With repeated cycles, the physical assetitself becomes smarter, providing even morenuanced data to its digital envelope. With everyadditional mile driven in each specific trip of GE’slocomotives, for example, its digital envelopes canbetter optimize fuel costs and emissions by proc-essing the total weight of the train, the car con-figuration, the topography of the route, and theenvironmental conditions along the route. Thisenables GE to offer new services in its locomotive

Competing in digital ecosystems 87

business to help drivers maintain optimal speedsthat minimize fuel consumption.

With the proliferation of sensors along withadvances in an array of analytical tools and artifi-cial intelligence, digital envelopes are applicableto nearly every physical asset today. A digitalenvelope of an Oral-B toothbrush being used bya consumer streams product-in-use informationon how the brush operates, including the speedof rotors and the interaction of its bristles withgums and tooth enamel. The toothbrush usesBluetooth connectivity and smartphone apps tostream the information. Digital envelopes of mat-tresses can capture data on individual consumers’sleep patterns through heart rates, breathingrhythms, tossing and turning, and even snoring.This information has the potential to dynamicallyadjust the contours of the mattress to enablebetter sleep. The information is already beingconnected to lamps for lighting adjustments orto thermostats for optimal temperatures whilesleeping. New prototypes are being developedto connect this information to pulmonologists orsleep specialists to detect sleep apnea and inter-vene medically if so required. Similarly, with thehelp of nanotechnology, liquid detergent digitalenvelopes may soon enable manufacturers ofwashing machines and detergents to sense theexact process of how the detergent cleans clothesin real time. Today there are digital envelopes ofpills (e.g., Abilify Mycite, a drug for bipolar dis-ease) that can inform doctors whether their pa-tients take their medicines (Belluck, 2017). Suchdigital envelopes are made possible by sensorsboth within each pill and on wearable patches,communication between which is managed bysmartphone apps.

Each digital envelope operates on a softwareplatform very much like how an individual operateson Google’s search engine or Facebook’s socialmedia platform. And just as Google or Facebookcan over time get an understanding of an individualuser based on the person’s interactions with theplatforms, so can the digital envelope of everyindividual asset gain information on that assetbased on its real-time operations. While sensorsextract and offer raw information, software plat-forms convert it into interpretable meanings fordifferent goals. For example, light bulb sensorscan offer raw data on the motion of objects. De-pending on whether the motion-sensing is in homes,warehouses, or city streets, software platformschannel the information for different goals suchas energy conservation or security in homes, effi-cient logistics in warehouses, or city safety instreets.

Product-in-use information is different from thekinds of business information firms have tradition-ally generated since the advent of informationtechnology (IT) over the last few decades (Dedrick& Kraemer, 2005). Conventional IT services collectinformation through databases or customer rela-tionship management (CRM) systems that largelyfocus on improving prevailing workflow efficienciesin the production and selling of products. Forexample, clothing retailer Zara’s database of cus-tomers and in-store transactions can help the com-pany forecast fashion trends or sales andaccordingly adjust its manufacturing and retailingcapabilities. Product-in-use information generatedby digital envelopes entails understanding whathappens to those products after they are sold bytracking the interactions of the products with oth-er objects in customers’ environments as they arebeing used. This difference is important, asproduct-in-use information can not only offer un-precedented insights into how products are usedbut also how they connect with other products,which expands networks and generates new oppor-tunities for value.

In recognizing the digital envelope as a digitalrepresentation of a physical entity and use, it ishelpful to appreciate its strategic significancebeyond just an amalgam of sensors and thesense-making of product-in-use informationthrough operating systems. It is a construct thathelps firms choose the unit of analysis to collate,analyze, and deploy product-in-use information.For locomotives, jet engines, mattresses, cars,or pills, each individual product is often thechosen unit of analysis. For search engines, itis an individual user. Yet all digital envelopesneed not be at the level of individuals or indi-vidual products. In manufacturing plants, digitalenvelopes are options not just for each individualmachine, but for a section of a plant or even anentire plant. In the first case, digital envelopeshelp monitor the performance of individual ma-chines such as robots; in the latter two cases, thedigital envelopes help monitor performance of anentire production system. What a firm intendsto do with its digital envelope and itsproduct-in-use information drives these choices.These choices, in turn, help anchor its objectivesfor its sensors, analytics, and operating systems.Envisaging digital envelopes is an important pre-cursor to a firm’s digital strategy. Indeed, as weelaborate below, how firms frame their digitalenvelopes and use them to channelproduct-in-use information into production andconsumption ecosystems drives how they com-pete in digital ecosystems.

88 M. Subramaniam et al.

4. Leveraging new opportunities fromdigital ecosystems: Strategic options

Building on the concepts in the earlier sections, wesee digital ecosystems as a combination of com-plex production and consumption ecosystems thatneed to be managed as a system of interdepen-dencies. Digital envelopes and the product-in-useinformation they generate are the prime movers todo so, injecting new value into both productionand consumption ecosystems. This is because afirm can intensify the value of product-in-use in-formation as it gets channeled into production andconsumption ecosystems in different ways (Glazer,1991). A firm’s strategic options can be framed ashow it chooses to channel its digital replicas:toward production ecosystems, consumption eco-systems, or both (see Figure 2). The four quadrantsin Figure 2 represent distinct strategic choicesabout how/where firms compete in digital ecosys-tems. The lower-left quadrant is about gettingready for digital transformation and setting upthe underpinnings to generate advantage. Theupper-right quadrant is about dominant orchestra-tion of digital ecosystems, signifying the nature ofemerging new digital monopolies. The other twoquadrants represent players that have segment-level advantages in ecosystems and are seeking toexpand their presence via various hybrid ap-proaches. These firms start with certain positionsin the digital ecosystem network because of theirhistory and heritage and subsequently seek newconnections (see Table 1 for a comparison of thequadrants). We expand below on this logic ofdigital ecosystems and offer a roadmap for firms

Figure 2. Strategic options in digital ecosystems

on how they can compete and partner with othersin digital ecosystems.

4.1. The digital foundation

Every firm begins somewhere in its digital trans-formation journey; the digital foundation is itsfirst stage. Here, a firm is on the periphery ofthe modern digital revolution and testing thewaters of digitization while maintaining the statusquo on prevailing business models and marketpositions. A company may introduce smartphoneapps for certain services or experiment with bigdata to better predict market trends and improveits prevailing workflow efficiencies. Most banks,for example, have smartphone apps that providenew features such as check deposits. Similarly,Domino’s customers can order pizza with theirsmartphones, Twitter, smart TVs, or smartwatches. Such efforts embrace new digital plat-forms but merely to extend prevailing supply chainstrategies and traditional IT capabilities that rein-force prevailing market positions. Firms exercisingthis option have not yet initiated digital envelopesor leveraged product-in-use information in a sig-nificant way. Yet, they may be building a founda-tion to do so.

4.2. Primary focus on productionecosystems

In this option, a firm channels the digital envelopeand product-in-use information primarily into itsproduction ecosystem. In so doing, it intensifiesthe value of product-in-use information through

Table 1. Digital ecosystem quadrant comparison

Digital foundations Productionecosystems

Consumptionecosystems

Digital monopolies

Corestrategicaction

Embrace new digitaltechnologies tomake incrementalchanges totraditional businessprocesses

Channel product-in-use information fromthe digital envelopeonto productionecosystems

Channel product-in-use information fromthe digital envelopeonto consumptionecosystems

Aggregate multiplesources of product-in-use information

Key characteristicsof product-in-useinformation

� Not yetoperational

� Extends a firm’sprevailing productfeatures and serviceoptions� Protected in-housewith tight controlover APIs� Scope restricted toproduct and user� Useful for productfeatures andservicescustomization� Useful forpredictivemaintenance

� Expands the firm’sscope into newdomains becausecomplementaryentities find newvalue� Shared with openAPIs� Scope expandsserendipitously;encouragesunstructured growth� Versatility ofproduct-in-useinformation forcomplementaryproducts/services

� Propensity tocontrol the hub ofthe digitalecosystem network� Relevance in manyoverlappingecosystems

Basis forstrategicadvantage

� None � Continuouscustomization offeatures and serviceofferings due tolearning over time

� Network effectsthrough interactionsamongcomplementaryentities

� Domination ofecosystem throughcontrol over multiplesources of product-in-use information

Competing in digital ecosystems 89

exchanges within its production ecosystem (Glazer,1991), with outcomes that largely reinforce andextend traditional sources of value creation. Theaction is depicted on the left-hand side ofFigure 1. Here, a firm also chooses to contain thescope of its product-in-use information from digitalenvelopes to interactions between its own productsand users through tightly controlled APIs that re-strict information sharing to within its own produc-tion ecosystem.

Caterpillar’s excavator, for example, may bedigging soil in a construction site anywhere in theworld, but its digital envelope can provide informa-tion on the precise conditions the excavator isworking in and the wear and tear to its parts be-cause of sensors in components that can detect theattributes of the soil and developing fault lineswithin components. Caterpillar uses this informa-tion to embellish what its prevailing productionecosystems were designed for: providing reliableproducts and efficient service to its customers.Traditionally, Caterpillar strived to design reliableexcavators capable of working in all kinds of ter-rains; now, by observing more accurate wear and

tear during actual use, it can allow its customers(construction companies) to price their rentalsmore accurately. Caterpillar routinely standardizedmany of its products and components to make itconvenient for its dealers to optimize spare partinventory for quick service response. Digital enve-lopes channeled into production ecosystems makethese traditional capabilities even stronger. Withpredictive information on likely failure of compo-nents, Caterpillar can alert dealers to replace partsin advance, saving them costly downtimes. Further-more, the company is working on using digital en-velopes to enable 3-D printing, allowing forcomponents’ availability at the construction sitebefore predicted failures occur.

Two primary value-generating opportunities areof note here. One is through customization of prod-uct features and services that can be microtargetedfor specific users in ways that were not possiblewithout digital envelopes. Digital envelopes ofsleep mattresses as mentioned earlier can custom-ize each individual mattress based on ongoing prod-uct-in-use information of each user’s sleeppatterns. Before digital envelopes, attempts at

90 M. Subramaniam et al.

customization included features such as sleep num-bers that adjusted the inclines of headrests basedon the numbers the users chose. New designs beingprototyped are based on much more intricateproduct-in-use information of sleep patterns. Theyaim to adapt and customize the very contours of themattress, so that the mattress material adjusts itsshape and firmness to provide the best possiblesleep depending on each sleep pattern. Likewise,Procter and Gamble’s liquid detergents injectedwith nanotechnology sensors may soon customizeeach wash cycle based on specific attributes ofsoiled clothes. Oral-B can refine technologies be-hind brush motors and develop varying shapes,speeds, and rotation contours of the brush headscustomized for each user. Hotels can customizetheir room features and airline companies their seatsettings for each customer. These types of customi-zation can generate new revenue streams. Also,ongoing accumulation of product-in-use informa-tion generated by digital envelopes provides newsources of competitive advantage, as over timeproducts will become increasingly differentiated,unique, and difficult for competitors to replicate,which will create formidable switching costs.

The second value-generating opportunity is frompredictive maintenance. As digital envelopes canmonitor each component as it is being used, it cansense and alert breakdowns before they happen.Predictive maintenance services are particularlyvaluable when the cost of unexpected breakdownsis nontrivial. For consumer durables like dish-washers, refrigerators, or cars, unforeseen break-downs can be annoying. For many industrialproducts such as turbines or construction equip-ment, downtimes can be costly. In the health sector,hospitals can incur significant costs due to un-planned downtime of medical equipment such asCT scanners and MRI equipment. A 1% improvementin uptime in such machines can reportedly save theindustry $63 billion (Evans & Annunziata, 2012).Digital envelopes of GE’s machines in its healthcaresector help track, diagnose, and preemptivelymaintain them to reduce such downtime and earna share of these savings. GE calls such new foraysof revenue generation outcome-based businessmodels.

4.3. Primary focus on consumptionecosystems

In this option, a firm channels its product-in-useinformation from digital envelopes to initiate, en-gage, and orchestrate new consumption ecosys-tems. In so doing, it intensifies the value ofproduct-in-use information through exchanges

within its consumption ecosystem, or an array ofthird-party consumers of that information who con-nect it with other complementary information(Glazer, 1991). A firm consequently expands itsvalue-creating opportunities from new sources.The action here is on the right-hand side ofFigure 1. The Nest thermostat, for instance, has adigital envelope for each of its units installed in ahome and constantly updates product-in-use infor-mation based on the interactions of its users with itsproducts. This information, however, is used beyondjust adapting or customizing temperatures in ahome or reinforcing its traditional functional attrib-utes. With its Works with Nest program, Nest invitesand connects with scores of external entities andIoT enabled products to offer services far beyondwhat traditional thermostats offer. Nest thermo-stats connect with smartphones, cars, and trafficinformation to sense time of arrival accurately andto operate garage door openers, coffee machines,or light bulbs. They connect to energy providers tosense the most optimal times to operate variousappliances such as washing machines or dish-washers. The objective is to initiate a mushroomingconsumption ecosystem, where thousands of exter-nal entities can connect with Nest and offer anexpanding set of services based on the product-in-use information generated by Nest’s digitalreplicas.

Focus on consumption ecosystems generates val-ue that is different from a focus on productionecosystems. When focusing on production ecosys-tems, prevailing products are embellished to per-form better within their traditional domains. Asmart toothbrush that adapts to each individualapplication becomes a better toothbrush and ajet engine that informs the right altitude for a flightis a better jet engine; in so doing, digital envelopesessentially enhance the firm’s own traditionalstrengths and competencies. Focus on consumptionecosystems, in contrast, draws on strengths fromexternal entities. For example, the Nest thermo-stat’s value is enhanced because of how externalentities add new functional attributes to the basicproduct and leverage its product-in-use informationfor more customized services. That also allows firmsto expand into domains not necessarily connectedto their prevailing value chains or core capabilities(such as sensing temperature). The scope of cus-tomization through configuring consumption eco-systems is also broader because of the flexibilitydigital connectivity offers to add various comple-ments as options even after the product is sold. Asmart light bulb, for instance, could be customizedto track inventory within smart warehouses, tomanage security within smart homes, or any other

Competing in digital ecosystems 91

creative use, depending on which complementaryobjects it connects to or which consumption eco-system it chooses to harness.

To do so, however, a firm needs to open itsproduct-in-use information from digital envelopesto external entities. The APIs are managed to en-courage interaction among complementing entitiesand generate new value beyond the traditionalscope of the product. Firms can then forge compet-itive advantage from network effects (McIntyre &Subramaniam, 2009) or the value from the size andvariety of the external network of entities willing toparticipate and contribute to the core product. Thisapproach also opens possibilities to leverage newideas from the creative imagination of any entitythat could connect with the firm, even years afterproducts are sold. New opportunities are usuallyunscripted, serendipitous, and arise from sharingproduct-in-use information with all kinds of likely orunlikely complementing entities.

4.4. Digital hybrids

Firms with a strong heritage in managing valuechains may first focus on production ecosystems.GE and Caterpillar, for example, commenced theirdigital transformation journey with a focus on pro-duction ecosystems with predictive maintenanceand outcome-based services. In contrast, firms witha software technology heritage like Uber have firstfocused on consumption ecosystems in autos. Ineither case, firms that perceive benefits in bothproduction and consumption ecosystems tend toexpand across those ecosystems, which we describeas digital hybrids. They may expand on their own orform partnerships with entities possessing comple-mentary strengths in the alternate ecosystem.

If the firms focused on production ecosystemsfind their product-in-use information to have in-trinsic versatility or the potential to be of value toexternal entities outside the scope of their tradi-tional value chains (Kude, Dibbern, & Heinzl,2012), they will tend to expand into consumptionecosystems. Versatility, of course, can vary acrossdifferent products. In the consumer sector,product-in-use information for dishwashers or mi-crowave ovens may be less versatile than for lightbulbs or thermostats. In many industrial sectors,product-in-use information from any one asset isof value to other assets that jointly contribute tothe overall sector such as in power stations,manufacturing plants, robotics, or constructionprojects. In power stations, an orchestrated co-ordination of GE’s turbines with other assets canimprove overall efficiency of power generation,creating incentives for GE to channel its digital

replicas for its turbines toward a consumptionecosystem beyond its production ecosystems.Similarly, construction project sites have manyintricate interdependencies among hundreds ofother construction assets being used. It isestimated that 5% of project costs (often runninginto billions) are wasted in rework because of alack of coordination among various vendors(Hwang, Thomas, Haas, & Caldas, 2009). Withconnectivity and information sharing across theseassets, both the equipment providers and theircustomers can benefit from better coordinationand reduced rework by being part of a commonconsumption ecosystem. Caterpillar is aiming tobenefit from participating in such a consumptionecosystem in addition to its current focus onproduction ecosystems.

In the automobile sector, firms are beginning tounlock new value from cars’ product-in-use infor-mation, which appears to be versatile. For instance,Ford has expanded its focus on production ecosys-tems and predictive maintenance services for en-gines, brakes, and powertrains to sharing its cars’product-in-use information with external entities tocreate a new consumption ecosystem. Through itsSYNC 3 voice-activated technology, some Ford mod-els allow drivers to order coffee while driving byusing Amazon’s Alexa. Relying on its location whileon the road, and connectivity with weather andtraffic information, the car could predict exactlyhow long it would take for the user to get toStarbucks and prompt its employees to start pre-paring the coffee. Starbucks could have peopledeliver coffee at the right temperature to thecar. Because Ford’s MyPass app can contain mobilepayment information, a user could complete thetransaction without having to leave the car. Parkinglots equipped with sensors (offered by city admin-istrators) are also soon expected to be part of thecar’s consumption ecosystem, allowing drivers tofind empty parking spaces efficiently.

Digital hybrids coming from the other direction,or from consumption to production ecosystems, doso for better control over product-in-use informa-tion. The premise is to control the physical assetsthat generate product-in-use information in thefirst place, which would allow firms to better or-chestrate their consumption ecosystem. Not sur-prisingly, technology titans (e.g., Google, Apple,and Uber) with strong capabilities in managingconsumption ecosystems are now venturing intothe production of automobiles through partnershipsand joint ventures. They are betting on a scenario inwhich driverless cars may be able to competeprimarily on services derived from personalizedinformation on users, including:

92 M. Subramaniam et al.

� Enabling cars to predict and arrive when needed;

� Directing the ride based on the user’s itinerary;

� Offering stops at favorite coffee shops or stores;and

� Streaming customized news, videos, or music.

Designing and controlling their own digital rep-licas of their own fleet of driverless cars may enablegreater control over product-in-use information andgreater effectiveness in managing theirtransportation-as-service platforms.

To evolve into digital hybrids, firms often usepartnerships and acquisitions. Caterpillar recentlyacquired Yard Club, a startup it had initially fundedto develop a shared platform for various construc-tion site contributors to coordinate their work andventure into consumption ecosystems. Uber, whichhad no prior experience in car manufacturing, haspartnered with Mercedes-Benz for a driverless carproject. Ford purchased on-demand shuttle servicecompany Chariot for $65 million to gain insights intomanaging transportation as a service in cities likeNew York and San Francisco.4.5. Digitalmonopolies

With digital ecosystems upending traditional indus-tries, they also bring new drivers of monopoly pow-er. Monopoly power has long been considered thebedrock of competitive advantage for firms (Porter,1979). Traditionally, attractive industry structuresdrove monopoly power for industry incumbents,which was earned through commitments and invest-ments in production capacities, know-how, orbrands (Demsetz, 1973). These firms assessed mo-nopoly power through observable metrics such asconcentration ratios, and dominance through rela-tive market shares. Digital ecosystems, however, donot follow the contours of conventional industrystructures. Dominance may not be necessarily tiedto or even noticed through market shares withinwell-circumscribed boundaries. Instead, domi-nance may stem from the right to controlproduct-in-use information from digital envelopes;monopoly influence may be won by controlling theflow of product-in-use information across severalinterconnected ecosystems.

Such new jockeying for digital monopoly can bebest observed in the tactics of technology titansAmazon and Google in their contest to control thedigital envelopes of most individuals (Iyer, Subra-maniam, & Rangan, 2017). Ever since Google devel-oped its search engine, or Amazon its online retailplatform, they started constructing individual

digital envelopes for each of their users. Everysearch made on their platforms enabled them toaggregate select facets of user persona. Similarly,with every Netflix movie watched, every Alexa orSiri query, and every interaction with friends onFacebook, individuals impart different slices oftheir persona and steadily contribute to a fulldigital envelope of themselves that is controlledby a technology titan. This trend is compoundedby the ubiquity of e-commerce platforms, socialmedia, IoT devices, and smartphone apps and theinternet, which encourages more and more indi-viduals to leave digital traces of their preferen-ces, behavior, and persona. This has provided thetechnology titans an unprecedented opportunityto construct as complete a digital envelope aspossible for every individual that most closelypredicts user behavior. The more such insightpossessed by a titan on individuals, the greatertheir influence over a host of different consump-tion ecosystems.

Consider the automobile sector where everycar ride can provide a treasure trove of informa-tion about the user. Yet, any single automaker likeFord or Toyota has access only to that informationgenerated by its own assets’ digital envelopes.The technology titans, in contrast, have access tothe digital envelopes of millions of individuals;armed with stronger insights on individual userpersona, they are better equipped to offer ser-vices users may prefer from their cars. For in-stance, through Alexa or Google Home, Amazon orGoogle may have better insights on a user’sday-to-day itinerary, the errands that individualmay run, his or her preferences for shopping, orhis or her choices for music and news sources. Thisgives them an advantage in managing such ser-vices in future automobiles compared to any sin-gle traditional automaker.

In homes, we may soon see appliances managedas a network (e.g., a washing machine is connectedto other gadgets). In such a consumption ecosys-tem, it is possible among other things to monitor theelectrical load being drawn by each appliance andthereby avoid an overload or take advantage ofshifting electrical costs when there is intraday dy-namic pricing. Amazon through Alexa or Googlethrough Google Home are better positioned to co-ordinate such ecosystems as compared to any indi-vidual appliance maker. In other words, thesetechnology titans are occupying important hubs(Iansiti & Lakhani, 2017) in several overlappingconsumption ecosystems of a vast array of consumerproducts, giving them special insights and influenceon each. Traditional appliance manufacturersmay persist to compete in concentrated industry

Competing in digital ecosystems 93

structures, yet, if value shifts to new services intheir consumption ecosystems, they may cede mo-nopoly power to the technology titans.

Barring a few exceptions, the technology titanshave yet to focus on nonconsumer industrial prod-ucts. In these domains, consumption ecosystemsare relatively more circumscribed and indepen-dent of one another. That is, the consumptionecosystems in power generation may not overlapwith those of aircraft manufacturing in any signif-icant way. Nor do they necessarily overlap withthe consumption ecosystems of other consumerproducts dominated by the technology titans.However, these consumption ecosystems withinindustrial sectors remain underdeveloped, yetto be envisioned and initiated. There may besubstantial first-mover advantages in initiatingthem and establishing early influence. But it re-quires a focused effort to entice all complemen-tary entities to be part of a common interoperableplatform. Some of these entities may be smallcontractors without adequate resources to createa digital front. Bigger players may need to investin them to incentivize their transformation. Othercomplementary entities may be competitors withtheir own plans to dominate the consumptionecosystem. For instance, GE may have to find waysto collaborate with Siemens or Asea Brown Boverito establish an effective consumption ecosystemthat allows power plants to pick seamlessplug-and-play options to enhance overall power-generating efficiencies. This looming battle overwho gets preferential rights to control the flow ofinformation from most digital replicas in the digi-tal ecosystem may shape the nature of new digitalmonopolies.

5. Rewire and reshape for digitaltransformation

New digital technologies have rewired how firmsand consumers are connected. It has created newinterdependencies that are not only reshaping theroles of conventional value chains but also bringingfresh complementary inputs at an unprecedentedscale. It has enabled the collection and sharing ofintricate product-in-use information that can besignificant drivers of value. The frameworks weoffer in this article, based on the concepts ofproduction and consumption ecosystems poweredby digital envelopes and product-in-use informa-tion, can help traditional firms better understandthese changes and empower them to engage indigital transformation.

Acknowledgment

We would like to thank Prakash Iyer andRajneesh Gupta for their helpful suggestionson earlier drafts of this article.

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