As digital technologies revolutionize how we do business, companies increasingly compete through ecosystems in which they partner with a variety of other firms and organizations. The relationships with these partners are determined by the data and operating resources they provide. This article offers a four-part framework to help companies identify the types of partners they need and outlines the challenges that the digital world adds to the relationships involved.
Over the past decade, an increasing number of companies have been leveraging data and digital technologies to enter new markets. Examples include Google’s entry into banking, Tesla’s move into car insurance, Apple’s move into the fitness market, and Vodafone’s entry into the financial services market.
Unlike diversifiers of the past, today’s digital diversifiers do not have to do everything by themselves. The digital context, and specifically digital connectivity, has provided companies the opportunity to engage with many more and much more diverse partners than before, and to develop elaborate digital ecosystems to help them enter and compete in the new markets. This, however, has given rise to two questions: How can a firm determine what types of partner it needs? And what kind of relationships should it forge with them?
In the period of 2020-2022, we conducted 40 semi-structured interviews with senior executives (CEO and CXO level) in 20 companies that faced these questions. We found that two key factors play a big role in determining the kind of partner a digital diversifier might need in entering a new market or disrupting an existing one:
Data in context.
Data in context captures people or asset behaviors in contexts relevant to the target market, potentially yielding the new entrant insights on what to offer the customers that even incumbent players do not possess. Of course, the importance of the data a partner can offer will vary. For example, the data that some app developers offer to Apple might be of peripheral value to Apple because of its limited scope. By contrast, the data provided by clients of GE’s maintenance platform, Predix, is absolutely essential to what Predix is trying to do — without this data, Predix has little scope to deliver on its asset optimization and preemptive maintenance value offering.
Operating resources and capabilities.
To enter the new market, a diversifier needs to be able to scale up its operations profitability — and it is unlikely to have all the resources it needs for that. Just like in the pre-digital world, having the right partners can be a fix. In some cases, a partner can develop and manufacture the products that the entrant intends to offer, sparing the entrant the need to develop its own manufacturing operations and capabilities. Alternatively, the entrant may lack distribution and marketing capabilities for the target market.
Once again, the usefulness of the partners will vary. Although the UK Meteorological Office (Met Office) may provide consulting companies with a wealth of data for them to develop new services for their customers, it is not otherwise involved in how these consultancies operate. By contrast, car companies that partner with Waymo, the Alphabet-owned autonomous driving technology development company, will help Waymo not only with valuable data but also with the manufacturing and distribution of these cars — in the process helping Waymo enter and scale up its operations in the driverless car market quickly and profitably.
These two factors provide us with classification scheme for what kind of partners each new entrant may need, as shown in the 2×2 matrix below.
In the upper left quadrant, we have partners that can be labelled as satellites — both the data they offer and the operating support they can offer are marginal; Apple’s app developers would be an example of this type of partner. In the upper right quadrant, we have complementors — partners that offer limited or marginal data in context but provide significant operating support. In the Salesforce ecosystem, for example, system integrators and specialized app developers contribute up to 80% of the value created (with the remaining 20% contributed by Salesforce itself).
In the bottom left, we have suppliers that provide valuable data in context but little else. The Met Office is a good example of such a supplier, offering its meteorological data to consultancies to develop services for their customers. Finally, in the bottom right quadrant, we have partners that can be called strategic partners — they provide both data in context that is of critical importance to the new entrant but also services and support that the diversifier needs to operate in the new market. The car companies partnering with Waymo can be classified as such.
With this framework, companies will be able to think systematically about the partners they need in entering emerging ecosystems or creating new ones. By looking at who might have relevant data and resources that it does not have, a company can identify potential partners and then determine what kind of relationship strategy it should adopt in each case. Let’s turn to look at a few of the challenges this will involve.
Today’s Partnership Challenges
Although value-chain partner relations have always been important for many companies, the management of these partnerships has been made more complex by the digital revolution. As the 2×2 matrix also shows, our framework helps us to classify these challenges by partner type.
Satellites have traditionally been relatively powerless. But this is changing, as shown by the recent formation of the Coalition for App Fairness by Spotify, Epic Games, Blix, Tile, Match Group, and Basecamp to ask Apple for fairer fees on Apple Store purchases. In September 2020, following the high visibility of these claims, Apple introduced several policy changes, such as removing its 30% fee on certain purchases which go through the Apple Store. In managing satellite relationships, managers should keep in mind the need to demonstrate reciprocity, which may not come naturally to large companies dealing with multiple satellite partners.
Here, the key challenge is managing the firm’s reputation or brand image. A senior executive at Nespresso told us that the company had repeatedly resisted entering into digital ecosystems for fear that its brand could be associated with “unwanted” third-party brands. Another well-known example is Alibaba. Alibaba’s Tmall relies heavily on its 50,000 merchants. Since 2010, Alibaba has been repeatedly accused of not stopping the sales of counterfeits by merchants on its platform. Jack Ma, CEO of Alibaba, has had to change strategy over the years: from denying the issue to accepting it and agreeing to cooperate with the authorities. Companies that neglect the risk of brand association in high visibility and high-speed digital contexts do it at their own risk.
Here, the challenge is often achieving deeper technological integration with partners. It may appear simple but there are potential hurdles at every turn. GE spent billions of dollars to develop the Predix platform. But immediately after its launch, GE started receiving complaints from ecosystem partners because the APIs and microservices were not enabling access to reliable data. The Predix platform had to be paused for several weeks because of these issues.
A senior executive at Oracle, the second-largest software company in the world, is conscious of the challenges: “Technological integration is much more than developing APIs or doing API-to-API integration. It is integrating APIs with the company technology architecture which makes the real difference, and this is complex and expensive.” Digital-born companies seem to have an advantage in this area. As the Global IoT Go to Market leader at Vodafone told us, “The likes of Google and AWS [Amazon Web Services] can integrate with pretty much everything.”
The biggest challenge here is contractual. This is evident in the attempts of Amazon, Apple ,and Google to enter the mobility industry by building strategic partnerships with legacy car manufacturers. But data ownership, privacy, and brand/branding clauses in these partnership contracts have proven difficult to overcome and most partnerships have not gone beyond the press release stage. As a senior executive at CBRE (the world’s largest commercial real estate services provider) told us: “In the past, the conversation among partners would be about trust and revenue sharing. Now, there are many more layers: brand, data, data usage, cybersecurity, etc. The legal implications are quite broad and unchartered.”
For example, consider the Netflix /AWS partnership that turned sour. When Netflix entered the TV and movie streaming market, they did so with AWS as a strategic partner. Over time, AWS developed the knowledge to read and analyze content consumption data and in 2016, Amazon launched its own streaming service, Amazon Prime. Consider, also, the experience of Vodafone. In its efforts to create a pet tracker service, the company spent two years negotiating a partnership with the second largest pet food manufacturer in the world. In the end, the deal fell apart: Who would own the data? Who could use the data? Whose brand would be customer-facing? Who would invoice and receive the initial payments? Without prior alignment on issues like these, complex negotiations inevitably break down.
. . .
The emergence of digital-enabled ecosystems has allowed many companies to enter and compete in entirely new markets — but it also creates new challenges. Given the plethora and diversity of partners available, firms can collaborate with an array of companies, not all of which contribute equally to the relationship. This implies that would-be diversifiers must first understand what types of partners they are building relationships with and then develop customized strategies for each. To make matters worse, the digital context has made the management of these partnerships even more complex and challenging than those in the pre-digital era. The additional challenges created by the digital context highlight the need to broaden and elevate partnership management capabilities in all firms. The skills that worked well in a pre-digital world may not be sufficient in the new context.