We are in the midst of a paradigm shift in the way businesses are organized. The traditional model of the integrated firm with its hierarchical supply chain is increasingly being replaced by business ecosystems, dynamic groups of largely independent partners that work together to deliver integrated products and services.
Most of today’s business ecosystems are built around digital platforms. Our smartphones, smart cars, and smart homes are powered by ecosystems of hardware suppliers and application developers; we increasingly order our food, transportation, and accommodation on digital marketplaces; and industrial companies are revolutionizing the way they collaborate by moving to IoT platforms.
Such collaborative networks are also playing an increasing role in addressing the world’s biggest challenges. This was impressively demonstrated during the early days of the COVID-19 crisis, when scores of new ecosystems emerged to coordinate health care services and balance utilization, to offer 3D printing capacity to produce medical equipment, to develop smartphone applications for virus tracking and protection, and more.
There are good reasons for the success of the ecosystem model: in an ecosystem’s startup phase, this model can quickly provide access to capabilities that may be too expensive or time-consuming to build within a single firm. Once launched, ecosystems can scale much faster than an individual business because their modular structure makes it easy to add partners. Moreover, ecosystems are very flexible and resilient; their modularity enables both high variety and a high capacity to evolve. Given all these advantages, it is no surprise that startups and established companies are rushing to build their own platforms and ecosystems.
However, there is a hidden and inconvenient truth: most business ecosystems fail. Research by the BCG Henderson Institute found that fewer than 15% were sustainable in the long run. If we want to harness the power of the ecosystem model, we need to understand not only the reasons for success but also the reasons for failure.
To understand how to improve the odds of success, we studied more than 100 failed ecosystems in a variety of industries and compared them with their more successful industry peers, using a systematic quantitative and qualitative analysis. We identified an ecosystem as a failure if it was dissolved, shrank to an insignificant market share, or was acquired for an amount substantially below its initial funding. Our database contains B2C, C2C, and B2B ecosystems and includes social networks, marketplaces, and software solutions as well as payment, mobility, entertainment, and health care services. On average, the ecosystems we studied had existed for 6.8 years and had raised funding of $185 million.
Here we summarize the findings and conclusions from our analysis, answering the following questions:
- Why are successful ecosystems so rare?
- How do ecosystems fail?
- When do ecosystems fail?
- What can you do about it?