In a 2001 commercial, a man sits at his desk in front of a MacBook computer (the Apple logo lets the viewer know). He starts nodding his head along with a rock song that plays from the speakers. The nodding progresses to a full body jam session, and the man adds the song (“Take California” by Propellerheads) to his list of favorites. It’s instantly uploaded from the laptop via USB to a card-sized device nearby. The song pauses as he grabs the device and pops in headphones. The music resumes, and he’s free to leave his desk and dance out of the room.
That commercial was the first for Apple’s iPod, a revolutionary MP3 player that could hold 1,000 songs in a pocket-size 6.5-ounce package. Before then, Apple made computers. The iPod was a pivot into consumer electronics. Even later, when the company would go on to produce phones and tablets, the question “What industry is Apple in?” was relatively easy to answer. If “Computer Manufacturer” didn’t quite fit the bill of the iPod and iPhone, “Technology” was an acceptable umbrella. It’s listed as such on the NASDAQ exchange.
This month, however, Apple’s new high-yield savings account attracted close to $1 billion in deposits in the first four days. Hold on a minute. The trend-setting company that used to make us dance around blaring pop songs is now acting like … a bank?
Ecosystems blur boundaries between industries
While the ability to deposit your money where you used to deposit your iTunes playlists may feel unexpected, Apple’s transition into financial services by partnering with Goldman Sachs is part of a larger pattern we’ve been following for a while. Through ecosystem collaboration, traditional industries are combining into something else. Columbia Business School Professor and Strategy Expert Rita McGrath calls them “arenas.” Miklos Dietz, senior partner at McKinsey, says the ecosystem economy will drive a new age of sectors without borders. Mohan Subramaniam, IMD Business School Professor of Strategy & Innovation, agrees it’s time to move past the boundaries of the Industrial Era to a new paradigm for the Digital Era.
The lines around industries were drawn by physical resources and supply chains, while arenas are driven by customer desires. According to McGrath, “An arena represents a set of resources that [a customer needs], with different players vying for those resources, each of whom may offer something quite different.”
Think about a customer buying a home. Of course, they need a physical dwelling. They will also need the financial services to take out a mortgage, appliances to reside in the home, and furnishings to decorate. For this reason, the “homes” ecosystem is reorganizing around customer needs—companies are collaborating across the customer journey, from the mortgage lender to the builder to the contractor who will redo the bathroom or the kitchen.
According to Dietz, be prepared to see the 88 sectors of the global economy reorganized into 12 large ecosystems, designed around human needs. Kaihan Krippendorff recently gave speeches to the Academy of Nutrition and Dietetics and to the School Nutrition Association, which led him to consider the robustness of the school nutrition ecosystem. Of course, it’s not only the schools that are responsible for delivering meals to children. Schools receive reimbursements from federal and state governments to contract with food suppliers for school lunches. Companies, communities, staff, and students make up the ecosystem of stakeholders. Sixty-five percent of US schools now offer farm-to-school programs which bring local farms into the school nutrition ecosystem.
The ultimate goal is to provide the ideal learning environment for students and to foster future talent for society. Dietz foreshadows that we’ll transcend the boundaries of education and food companies to a greater ecosystem of “Talent” where all stakeholders partake in setting students up for success and future employment opportunities.
Digital drivers behind the shift
In strategy, we’ve followed Michael Porter’s Five Forces for decades. The five competitive forces define competition intensity, and attractiveness and profitability for entrants in an industry or market. Industry competition used to be driven by:
- Existing competitors in the industry
- Potential of new entrants into the industry
- Power of suppliers
- Power of customers
- Threat of substitute products
Will Apple’s iPhone competitors, such as Samsung or Google, be a threat to the company’s new banking services? Unlikely. More likely banks should watch out for the IT giant they would never have seen as a threat 20 years ago when they watched headphone-outfitted silhouettes dancing across their TV screens.
The “threat of new entrants” demonstrates that the Five Forces model is still useful. But Subramaniam explains that an adjustment to the phrase “in the industry” is necessary: “Value chains became the engine for a firm’s capabilities and products, and markets were the means by which you could manipulate industry forces … that was what we understood to be competitive advantage.”
One of the reasons the definition of competitive advantage is changing is because if you look at the most valuable companies in the world today, the majority of their revenue comes from data, not from products. The ability to capitalize on that data and create new partnerships and new types of services will draw the outlines of the ecosystems that form. Ecosystems will evolve around coordinating complements to share data and capabilities in order to create the best experience for the customer.
Transcending your industry’s boundaries
To figure out where your company fits into the new ecosystem economy, step outside of industry boundaries for a moment. Consider the following:
- What is the higher order need you’re helping to fulfill for your customers (e.g., not only building a house, but a place to live, express oneself, and feel secure)? Defining this will help you identify a set of complementary products and/or services that may be part of your ecosystem.
- Imagine your customer achieving their goal. Who else is there that is part of that future state (e.g., Apple partnering with Goldman Sachs to develop a financial solution for its clients)? Come up with a list of other companies or types of companies that will benefit if you and your customer win.
- How could you partner with potential ecosystem collaborators who also care about your customers’ success? What benefits or risks might come with extending a hand to a company in another industry that also cares about your customers’ needs?
This exercise will help you to think beyond your existing list of competitors and the current definition of your industry to develop a customer-centric view of what you might create next. Use that vision to lay out the relationships you need to form and the possibilities for products or services you might work together to provide.