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The Growing Power of Digital Ecosystems

Connected convenience is now an expectation, putting many companies under significant pressure.

Mobile has very quickly caused a cataclysmic shift in today’s technology landscape, giving way to a new breed of consumers who expect information and services, literally right at their fingertips.

Think about how the experience of getting a last-minute reservation at a restaurant has changed in just a few years. Tap on your phone’s Yelp app and it recognizes your location, gives you a list of nearby eatery recommendations, offers you the ability to make a reservation with a few more thumb taps, and guides you to your destination with a GPS-enabled map.

This kind of convenience has become more than a nifty bit of technology to consumers — it’s now an expectation, and it’s putting many companies under significant pressure to innovate rapidly and constantly, especially as the most competitive businesses are building powerful digital ecosystems to race to the head of the pack.

Here’s how some of today’s savvy businesses are responding to these new expectations and pressures: They’re shifting the focus of information innovation from inward to outward, from within the walls of the enterprise to a much broader ecosystem that includes outside software developers, partners and users. It’s a new spin on the proven platform business model, fueled by opening up data and the innovation of app developers everywhere to deliver the mobile experiences expected today.

High-performing businesses are finding tremendous value in digital ecosystems, and are gaining advantage with each new app and each new user. Metcalfe’s law, which was popularized by Ethernet pioneer Robert Metcalfe, states that the value of a network to its users grows as the square of the total number of its users. So each member of the ecosystem adds value to the business and, in turn, draws value.

This has been going on for some time now, and has happened in obvious places. A clear example is Apple, which took the revolutionary approach of allowing external developers to build apps for its app store — a model that has been instrumental in Apple gaining market leadership, and one that so many platform vendors are now emulating in order to keep up. By leaning on external players, enterprises in today’s fast-moving market can quickly deliver products and services that customers might not have ever imagined before.

Other established players who have succeeded through ecosystems include Amazon, which relies on an ecosystem of external vendors; and Netflix, which transformed itself from a video-rental service to a content-streaming platform because of its decision to open its application programming interface (API) to partners. This enabled it to project its content across hundreds of different devices, cemented its position as a market leader, and helped it topple established companies like Blockbuster.

This ecosystem model is spreading to companies outside of the technology industry and transforming the way they think about business. Walgreens, a 114-year-old drugstore chain and the largest in the U.S., has seen great success by opening its data to partners and external developers to create innovative apps. One example of this is the QuickPrints feature that enables customers to print their smartphone pictures in the 8,000 nationwide Walgreens stores through popular photo-editing apps like Aviary and Pic Stitch.

This collaborative approach creates a win-win situation — Walgreens drives more customers to its store (who hopefully purchase more items in-store), while developers profit from revenue share, an expanded customer base, and a higher app store ranking. Walgreens has experienced 13x partner growth, and this is only bound to grow.

But what’s really new is how the ecosystem philosophy is spreading to industries that had been resistant to it, where the structures of businesses or the uniqueness of the vertical created roadblocks. The auto industry is a great example.

Who would have thought that cars would become the center of new ecosystems that include not only manufacturers, dealers, customers, and suppliers, but also developers? Or that giants like General Motors or Ford would encourage partners and developers to use their data to create apps for their automobiles?

The car, in fact, is a dream platform for apps– it’s been called “the world’s biggest smartphone” just for that reason (that analogy will be even more accurate this year, when GM is expected to start embedding cellular chips in its cars to connect directly to AT&T’s network ).

These carmakers’ visions go beyond linking your phone’s music app to your car stereo. Take Ford’s AppLink, which provides developers with Android and iOS software development kits. Or GM, which plans to give the developer community access to engine, vehicle, and even OnStar telematics data, to enable the creation of new apps for car owners.

We’re seeing similar developments in the heavily regulated health-care industry, which is populated with big companies that have proprietary and complex IT systems. Fragmentation and a lack of coordination between caregivers has been a consistent problem in health care — consider that the average Medicare patient has five providers.

Some of the largest companies in this industry are starting to move toward digital ecosystems. Kaiser Permanente signaled this new attitude this past summer when it invited third-party developers to build apps based on public facility and location information, which will allow patients to quickly locate the nearest clinic in an emergency.

Others are starting to build apps to monitor people’s activity, weight, blood pressure, and medication intake in ways that enable doctors and patients to better understand and improve health. New technologies now can make electronic health records interoperable, opening up the possibility for developers to securely create apps for patients and caregivers that function seamlessly across providers.

Of course there are still hurdles that could slow ecosystem growth in these industries. But the benefits of “opening up” — and the risks of not doing so — are too big for any industry to ignore, no matter how challenging the move toward the ecosystem model might be.

In a fully realized, digitally driven, multi-sided market, each new customer of a product becomes a customer for the whole ecosystem. Each new product or partner attracts more customers to the ecosystem. Well-executed, this model is a virtuous cycle that results in greater market share.

As interactions grow, generating more data and enabling more sophisticated analytics, the ecosystem behaves more intelligently and becomes increasingly valuable for all members: Platform provider, partners, and customers.

With proof that opening up — creating a community where companies, partners, developers and customers draw value from each other — really does pay, the population of laggards, regardless of their industry, will continue to get smaller and smaller. Those who act first will move further and faster toward securing market leadership. Those who don’t will be left in the dust.

Chet Kapoor is CEO at Apigee, a digital business platform that helps companies become leaders in the mobile-first digital world, using apps, data and APIs. He has been VP of content management and search Products at IBM, VP/GM for the Integration Group of BEA Systems, and CEO of Gluecode, an open source application server company, acquired by IBM. Reach him @ChetKapoor.

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