Once upon a time, you could succeed in business by building a better mousetrap—a product that was better than your competitors. Yesterday, you could succeed by building a better ecosystem.
Today, you need to build a better ecosystem that continues to be perceived as better and that somehow generates revenue in a world where customers expect things to be free.
A better product is not enough
Thus Farhad Manjoo writes in the New York Times how Barnes & Noble [BKS] built a better e-reader: the Nook, which is failing fast to competitors with more enticing ecosystems.
“In 2011, Consumer Reports proclaimed the Nook the best e-reader in the land, saying it surpassed the Kindle in just about every way…. Things haven’t played out well since... with its recent reductions in e-reader staff, the Nook’s end looks nigh.”
Mr. Manjoo goes on to explain the how smart customers think: they are looking, and need to be looking, for comfortable, familiar and durable ecosystems. They go with Amazon for digital stuff, Apple for hardware and Google for data. A isolated product like the Nook, even if objectively it’s better, is barely in the picture.
The Nook’s imminent death isn’t unusual these days. The business world that has never been more thrilling or more risky. It’s more thrilling because of the vast possibilities created by the Internet and related technologies. It’s more risky because power in the marketplace has shifted from producer to customer. As a result, even better products can disappear with alarming rapidity. By contrast, ecosystems that delight customers are difficult to build, but once built, are difficult to compete against.
The winners will be determined not only by building a better mousetrap, but also how that mousetrap fits into the things that customers are trying to get done is their lives, in other words, their individual ecosystem. The quandary for companies is how to meet the idiosyncratic needs of millions of different customers?
The Elastic Enterprise (2012) by Nicholas Vitalari and Haydn Shaughnessy explains how Apple [AAPL] met the diverse needs of hundreds of millions of individual iPhone users by launching its own ecosystem—a technology platform that enabled hundreds of thousands of developers to create Apps that could meet every conceivable human need and to offer them directly to customers. The result is an ecosystem that is easily adapted to meet the needs, preferences and passing whims of every single user—a feat inconceivable with traditional management practices.
Although more people today buy a Samsung phone, with its Android ecosystem that emulates that of Apple, iPhone purchasers spend much more time actually using their phone and living in the environment that Apple has created and the users have personalized. As a result, customers are willing to pay premium to Apple. As Michael Blair writes in Seeking Alpha,
“At 80.356 million units at an average selling price of $300, Samsung generated $24.1 billion in revenue (Q3 2013). In comparison Apple at 30.33 million units with an average selling price of $650 generated $19.7 billion in revenue (Q3 2013).”
So long as Apple’s ecosystem continues to delight, the long-predicted demise of the iPhone hasn’t happened. The iPhone is not just a product or a phone: it’s a whole ecosystem.
The fickleness factor
Then there’s the fickleness factor. “Will the millions of people who flocked to Pinterest and Snapchat stick around?” writes Farhad Manjoo in Fast Company.
“It feels that way now. But three years ago, one would have said that Groupon's deals had ushered in permanent changes to the way we live. As with that poster child for outsize expectations, many of today's innovators rely on external factors for growth. Pinterest, for one, has been heavily fueled by Facebook sharing, and Fab, the design-centric retailer, spends heavily on marketing. Turn off those spigots and does growth shut down, too? Ask Zynga what happened after Facebook decided its users didn't need to see all those FarmVille updates.”
Right now, Apple's ecosystem is still cool. But only continuous innovation will keep it cool.
The right price is “free”
All this is good news for customers. “There is a larger lesson in this story,” writes Farhad Manjoo in discussing the WhatsApp acquisition by Facebook [FB].
“When telecom companies control specific protocols on their lines — whether it’s texting, voice calls or even cable TV — customers lose out. And as soon as our devices get access to the open Internet, we have a bounty of competitive choices that reduce prices and improve service.
“What happened to texts is likely to happen to voice calls, too, in a few years’ time. Because of competition from FaceTime Audio, Google Hangouts, Skype and lots and lots of other Internet-phone services, few of us will worry about voice minutes anymore; for some, that might even be true today.
“And perhaps the SMS story will play out on TV, too. Cable is expensive and inflexible. Internet-based alternatives like Netflix and YouTube are cheap and available everywhere. In the long run, there is only one way that story ends.”
Good times for consumers but big pitfalls ahead for existing business models. Big Bang Disruption lurks just around the corner.
And read also:
The business disease with no cure: big bang disruption
Carlota Perez: Technological Revolutions and Financial Capital
Navigating the phase change to the Creative Economy
Leadership of the Economic Phase Change
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Steve Denning’s most recent book is: The Leader’s Guide to Radical Management (Jossey-Bass, 2010).
Follow Steve Denning on Twitter @stevedenning
