Board Directors and Chief Executive Officers

Collaborating for Competitive Advantage: How CEOs Create and Manage Successful Ecosystems

 



​​Will Lewis, the CEO of biotech firm Insmed Inc., wants to see a day when his company puts an Amazon Alexa in every one of his customer's homes. It won't be a marketing stunt, instead, Lewis sees the interactive device holding the potential to help his firm to better serve its patients, who suffer from a rare lung disease. With patients' consent, for example, Insmed could regularly remind patients when and how to use its experimental inhaler, answer common questions about it, and make it easier for patients to communicate with their doctors and pharmacists. Ultimately, Lewis believes this would help patients form the right habits to maximize the value of his firm's therapy. Insmed focuses "very heavily on the delivery of patient satisfaction, not just the drug to the patient in a logistical supply chain sort of way," Lewis said. "That means building networks with other companies that are willing to try to find ways to make [life] easier for the patient." Toward that end, Lewis is exploring other similar partnerships beyond Alexa; one to provide smarter inhalers that would track patient usage, another to make higher-end packaging more befitting of the therapy's high value, and another with a network of nurses who could check in on patients in person.

Ecosystem-based collaboration to enhance competitive advantage has been common in the technology sector for many years: think Google building its ecosystem around an Android platform to compete with Apple's ecosystem built around its own iOS platform. Now, ecosystems are moving to sectors beyond tech. Carmakers like BMW, Daimler and Ford are building ecosystems around self-driving vehicles, navigational systems, fleet management, and financial services. Likewise, appliance makers don't merely compete on the basis of their own features; instead Samsung's Family Hub refrigerator lets customers place grocery orders via Mastercard's payment processing system and then await delivery by FreshDirect or ShopRite. Meanwhile, a consortium of the US's largest consumer banks, including Bank of America Corp. and JPMorgan Chase & Co, teamed up in 2017 to launch Zelle, an app that allows their customers to make instant peer-to-peer payments from their accounts.

This move from monolithic corporate structures to an open environment is largely driven by the opportunities and threats posed by ubiquitous technology and disruption in our world today. In particular, companies need to develop crisper understandings of their customers, taking risks and failing fast when it comes to meeting their needs. They need to move from offering proprietary solutions to creating networks that give more options. They need to reassess employee skill sets and recruit digital natives to keep up with the faster pace of change. They must also face heightened expectations from financial stakeholders – many of whom not only expect strong financial growth, but also new strategies around a larger social purpose.

To better understand how CEOs think about their ecosystems and manage relationships with multiple partners, Russell Reynolds Associates partnered with Professor Andrew Shipilov of INSEAD to survey leaders across a wide range of industries. This paper is a sample of some of our initial findings, representing insights from CEOs at technology, financial services, healthcare, and consumer companies in the US, Australia, and Europe.

What we learned from CEOs at the forefront of this trend is that building an ecosystem is not an easy task. Whatever form an ecosystem takes, it requires new ways of thinking about strategy, leadership, and talent management. An ecosystem must drive innovation, turn profits, and make a big enough difference for each partner to justify its existence. Yet for all the challenges an ecosystem presents, its potential rewards are much greater. In fact, many of the CEOs we talked to see it as the only way forward in an era when the pace of change is faster than any one company can tackle alone.

Why ecosystems?

The core value proposition of an ecosystem is that it unites providers of complementary products and services to create a unique offering for their shared customers. That means the first step to launching one is to take stock of your own organization: its mission, its values, its brand, and its current resource limitations. "Where you really find the interesting opportunities is when you've kind of figured out where the game is going based on customer insight and you're able to sit back and reflect based on your capabilities and other capabilities that you may be lacking, and [from] that you can create the ecosystem," said Bill Meaney, CEO of $3.9 billion data storage company Iron Mountain Inc. The company uses its data centers as platforms for multiple partner collaborations, including a well-known joint offering with Dell EMC. At Zebra Technologies, a $3.6 billion manufacturer of marking, tracking and computer printing technologies, CEO Anders Gustafsson characterizes the ecosystem relationships as "exploring cooperative developments around technologies, much more focused on joint innovation and product development activities, so there's not much of a formal agreement or contract."

Ecosystems also offer companies an opportunity to test the waters in a new market without bearing the full cost of entry. When an industry is new, "it's always a challenge to make investments ahead of the curve," said Dion Weisler, CEO of $52.1 billion computer and printer maker HP, Inc. Before committing capital to in-house development, it's essential to assess what the company can borrow from others. W.W. Grainger Inc., a $10.4 billion distributor of industrial supply products, has explored partnerships that help it stay ahead of the curve. "With changes in technology happening at such a rapid pace, there are certain circumstances where it makes sense to leverage a network, as opposed to making an initial investment," said Grainger Chairman and CEO D.G. Macpherson. "For us, an example of that is how we look at 3D printing. There are companies where 3D printing is core to their business, so naturally, they disproportionately outspend a company like ours, which is keeping an eye on that technology at this point. That's the benefit of a well-formed, high-functioning and comprehensive ecosystem."

Top Lessons for Ecosystem Success

Though each ecosystem is intended to be uniquely innovative and disruptive, we found some common themes in our research.

 

Start with the CEO: Like many strategic initiatives, ecosystem building almost always begins with the CEO's relationships. The endorsement from the top is often a necessary pre-requisite for an unfamiliar initiative to get traction within an organization, and to garner the appropriate level of commitment from the partner organizations. That doesn't count out the initial idea coming from other employees; in many cases, they may be best-positioned to spot advantageous alliances. To be successful, however, the CEO must be an active participant in the set up and oversight of the collaboration.

Iron Mountain CEO Bill Meaney noted that the company's well-known partnership with Dell EMC began because of the strong relationship he had with a similar-ranking executive at EMC. "A big part of it came because [that executive] and I created a level of trust and chemistry that would make it work," said Meaney. It has continued with a successor executive because of both leaders' ongoing commitments to the relationship. "It works because the two of us get on the phone and will it to  work,” said Meaney. “It requires very senior management attention” to be successful.

"Personal relationships between the senior teams really matter," agreed Simon Segars, CEO of British multinational semiconductor and software design company ARM Holdings plc, which saw $1.7 billion in 2016 revenues. "Where you compete and where you cooperate changes every day of the week, and there are times when adult supervision is required." In other words, as ecosystem partners sometimes cooperate and sometimes compete with each other, relationships between senior teams help temper competitive instincts and keep focus on long-term value creation.

From there, however, it's equally essential to foster multi-level connections across both organizations. That is, just as the CEOs of partner companies should have direct relationships to each other, so should the senior managers, mid-level managers and even lower level employees. In the short-term, multi-level connections will help the collaboration become more embedded in each organization, and in the long-term, it will help ensure that the partnership can survive as people change jobs.

Partner based on complementary strengths, shared vision, and trust: A common theme across all our conversations was the notion that partners needed to share values and trust in order to succeed. Often, partnerships are formed without contracts, or a complete understanding of what the collaboration will look like. That means understanding your partners' true motivations, and looking for outcomes that will genuinely benefit both sides of the collaboration. With trust as a common denominator, companies are freer to be innovative and take risks.

Weight Watchers International Inc., for example, recently entered into a partnership with MSC Cruises to begin offering health and wellness-themed cruise packages. Weight Watchers CEO Mindy Grossman said she felt comfortable moving forward with it in large part because MSC Chairman Rick Sasso's philosophy is to consider every partnership a long-term investment. She described his view – with which she resonates – as seeing a partnership "as an investment, not because you have it in a paper contractually, but because you're building value together and creating something very unique." As a result, each will invest actual resources to making it successful. On Weight Watchers' side, the $1.3 billion company will upgrade its technology and call centers to ensure a seamless enrollment process for the cruise, while MSC will ensure the actual consumer experience is worthy of both brands. "This is a situation where the two companies are completely invested and aligned together," said Grossman.

Seek uncommon partners: Many companies collaborate within their industry, but an ecosystem often means going outside the industry. The CEOs we spoke with emphasized the need for seeking uncommon alliances to create unique offerings; Insmed's ambitions of collaborations outside the pharmaceutical industry with technology and packaging partners are classic examples. In other words, common partners typically offer complementary products or services to your current industry. Uncommon partners make complements or substitutes to the industry that you want to disrupt. Consider HP's recent collaborations with some 50 chemical companies to support its nascent  

3-D printing business. Unlike 2D printers which use similar inks, 3D printers are intended to use a wide range of materials. "The problem we're trying to solve with 3-D printing is to rival and surpass the speed, quality and cost of traditional manufacturing methods," said HP CEO Weisler. "We could sit here all day, every day, trying to make different types of plastics or polymers, or we can engage a very broad ecosystem that's been doing that for decades and invite them onto our platform." Since setting up an open materials platform - the equivalent of an App store for industrial plastics – HP has quickly gained the largest market share in the segment, selling printers around the world, Weisler said.

Create a common vision of success: It goes without saying that all those involved in a collaboration must see the value in it for their own organization. Even when the partnership makes sense conceptually for each partner, though, it's still essential for both sides to agree on what success would look like in the form of clear metrics, or key performance indicators (KPIs).

Those indicators can take different forms. Some CEOs look exclusively for quantifiable gains. At Viavi Solutions, Inc. (formerly JDS Uniphase), an $811 million provider of network test, monitor and assurance technology to telecoms, CEO Oleg Khaykin considers collaborations with partners to be strategic only when they have a clear impact on either costs or revenues. If a potential collaboration is not projected to achieve at least one of these objectives, it doesn't get a green light. "When I think about ecosystems and partnerships, you don't do them to make yourself feel good," said Khaykin. "It's all about making money at the end."

For other companies, KPIs are not necessarily defined in monetary terms. In HP's emerging 3D printing business, for example, the goal of a collaboration with a partner is often to create a new solution for a particular customer. "We'll both figure out what that success looks like and if we are to succeed, what would be the outcome?" said HP CEO Weiss. The two "set some objectives that both companies will benefit from," get sign-off from the end customer, and get to work. While target revenues and profits are not necessarily spelled out in these scenarios, defining a specific outcome still provides powerful alignment. "If you can't measure it, you shouldn't be doing it," said Weiss.

Select the right team and coach them for success: Getting an ecosystem off the ground requires plenty of tender, loving care, which usually means assigning dedicated people on each side to keep things moving smoothly. Yet working across ecosystems can be uncomfortable and feel difficult to manage, as it often requires bridging traditional reporting structures. As a result, CEOs talked about selecting people with both deep organizational knowledge and a humble, diplomatic work style to lead their collaborations. Viavi's Khaykin has tapped the same two or three individuals to help him run ecosystems at each company he has led due to the rarity of these skills. "You've got to know how to make a deal," he said, but also "to be like a chameleon," able to converse with technical people and senior managers with equal ease.

At Avnet, a $17 billion distributor of electronic components and solutions, CEO Bill Amelio looks to develop the right talent to execute in a new way. "An ecosystem environment demands an agile skillset taking our business to the next level. Our efforts are focused on promoting a culture in which our employees thrive on being comfortable with the uncomfortable, embracing unpredictability.

At the same time, ecosystem leaders need to have a willingness to disrupt the status quo. "In many corporations, particularly market leaders, people get comfortable with the way you've done things," said Craig Drummond, CEO of Medibank Private Limited, a large private health insurance provider in Australia. For an ecosystem to thrive, though, its leaders must have "external-facing curiosity, preparedness to change, preparedness to embrace others, and preparedness to take risk to advance the enterprise."

What Not to Do

Sustaining trust in an ecosystem often means looking beyond the short term self-interest of the firm. To that end, CEOs might need to modify and even restrain standard business processes to avoid some common mistakes:

Bring in lawyers too early: As many CEOs noted, lawyers and contracts should come at the end of the process – or even after some collaboration is underway – not at the beginning. According to Grainger's Macpherson, bringing in the lawyers too early can stop ecosystem development before it gets off the ground. His advice is to keep your teams small and focused on the customer problem you are trying to solve, then, "bring the lawyers in at the end so you have a fighting chance of building an ecosystem that might work."

Try to eat a partner's lunch: In an ecosystem-driven world, partners are often also competitors; a long- standing challenge for tech companies. The solution, said ARM's Segars is to optimize for the long-term, even when it means giving something up in the short-term. In ARM's case, that means supporting widespread adoption of its technology over provoking conflict by capturing short-term gains in any particular market. "We look at it and say, we need to play a long game here," said Segars. "Yes, you can have a big argument [with a partner] and you might be right, but you'll probably lose in the long term." This long-term approach helps companies to develop a reputation for being reliable partners.

Take on too many partners: As the previous insights have shown, ecosystems take significant time and effort to manage. The CEO has to have a personal relationship with the CEOs of the partner companies, every collaboration should have its own KPIs, plus a dedicated team in charge of the relationship – and the list of requirements goes on and on. That means any ecosystem designer has to clearly decide who its key partners are and then invest in building strong relationships with them.

Given the resources it takes to manage such ecosystems, some companies set high hurdle rates for entering into them. Weight Watchers for years has put its name on food products, but as the company tightens its brand to focus on health and wellness, it is getting out of any products that have artificial ingredients and sweeteners. The company is also applying that lens to partnerships. "We had to look at every partnership and say, "Does one plus one equal ten? Are we more powerful together?" said CEO Grossman. "If it's not doing something very, very significant for our brand and perception or it's not doing very significant for our revenue and outcome, or if it's not doing anything significant to serve our members and our vision, then it's not going to make the cut."

Conclusion

As the Roman Emperor Marcus Aurelius famously wrote between 168 and 180 A.D.: "We were born for cooperation." These words ring true today as well. Finding ways to make one plus one equal ten is one of the paramount challenges for companies in the 21st century. Based on what we've heard from CEOs, it's clear that ecosystems will continue to be one of the leading tools for value creation and technological progress for the foreseeable future.



AUTHORS

MALLORY SAMSON is the firm's Global Knowledge Leader for the Consumer Sector at Russell Reynolds Associates, where she specializes in understanding the confluence  of  consumer  trends and transformation and corresponding talent needs. She is based in Chicago.

ALIX STUART is a senior writer with the Center for Leadership Insight. She is based in Boston.

ANDREW SHIPILOV is a John H. Loudon Chaired Professor of International Management at INSEAD, a top global business school with campuses in France, Singapore and Abu Dhabi. He is an expert in the areas of strategy, innovation and digital transformation. Andrew is a coauthor of a book Network Advantage: How to Unlock Value From Your Alliances and Partnerships (Wiley, 2013).

FOOTNOOTES

  1. We define an ecosystem, and ecosystem-based collaboration, as a group of many companies working together to create customer value. This definition covers a spectrum of partnerships, ranging from symbiotic relationships (such as Apple and apps) to collaborations to solve a problem for a common customer (such as HP's 3D printer and industrial materials companies), to full partnerships providing shared vision and value through complementary capabilities (such as Weight Watchers' partnership with MSC Cruises).
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Collaborating for Competitive Advantage: How CEOs Create and Manage Successful Ecosystems