Traditional companies are facing an unprecedented threat to the way they do business. Many are losing ground because they don’t have the digital capabilities to meet the ever-growing expectations of customers. For many, this digital weakness is leading to declines in revenue, profits and stagnant valuations.
In the long run, we expect that barriers to entry will fall, the rules of engagement for businesses will change, and customer journeys will be completely rethought and reshaped. For incumbents, however, there are more pressing challenges. This is why an ecosystem strategy is an imperative for most institutions.
Traditional companies face challenges from highly advanced digital giants, aggressive digital start-ups and digital platforms that support the sharing economy. These new companies are revolutionising access to data, significantly reducing information asymmetry, achieving radically lower acquisition costs and offering full customisation.
Meanwhile, customers are becoming increasingly demanding. As mentioned previously, they now expect higher product standards, as well as fast and efficient customised service — and become impatient when their needs are not met on time. But in some ways, they are more open-minded than ever — many customers, especially in emerging markets, are willing to hand over some of their personal-behaviour data in return for better, more tailored services.
Stagnant Performance and Valuation Growth
More customers are turning to digital firms for products and services, which puts traditional companies without strong digital offerings at a disadvantage. The banking industry is a prime example. Some digital firms have integrated financial products into their ecosystems, thus challenging banks’ business models, taking their customers and fragmenting the market. Payments, deposits and other highly bundled financial products are being re-bundled in a different way to meet customer needs.
While the online financial services industry has grown tremendously over the past five years, the banking industry as a whole has been losing growth momentum.
Traditional companies clearly need to urgently explore breakthrough opportunities. The strategic benefits of ecosystems present several clear benefits:
• Ecosystems lower customer acquisition costs: Ecosystems can radically reduce customer acquisition costs because they enable automation on a large scale and, by integrating purchasing pathways, allow customers to buy a variety of products and services on a single platform.
In the banking industry, ecosystems can deliver customer-acquisition cost savings of as much as 10% to 20%, according to McKinsey analysis.
• Ecosystems provide access to data and opportunities to monetise it: Ecosystems enable companies to obtain massive amounts of highly accurate information ranging from logistics data to behavioural data. This constitutes considerable monetisation value.
Jack Ma’s Alibaba Group Holding Ltd is an example. Accounting for 58.2% of China’s online retail sales, the tech giant benefits from access to internal and acquired data assets from 576 million active accounts on Taobao, its shopping website — and the world’s biggest e-commerce platform. In particular, Alibaba employs advanced analytics to conduct consumer behavioural analyses and make purchase-relevant predictions.
As evidence of its success, Alibaba’s 2018 first-quarter (1Q18) revenue grew by 56% over the same prior-year quarter, and continued at about the same rate in 2Q18, mainly through improvements in the digital algorithms through which it targets advertisements to customers.
• Ecosystems enhance customer relationships and retention: Ecosystems can transform how companies engage with customers, enabling them to create diverse, monetisable touch points, generate product offerings that meet specific customer needs and offer frictionless experiences that reduce customer loss and churn.
Meituan-Dianping, a website in China for local food delivery services, consumer products and retail services, is a clear winner in this respect. The company acts not only as an aggregator that finds ideal restaurants for takeout food, but also as a platform where customers can buy movie tickets and book hotels. As a result, Meituan enjoys a highly impressive customer-retention record. In the first half of 2018, the takeout-food branch of Meituan claimed about 60% of the market, exceeding the combined market share of two rivals, Ele.me Inc and Baidu Inc.
• Ecosystems provide valuation upsides and help maintain competitiveness: For digitally focused companies, another upside of taking part in the ecosystem economy is the potential to attract the attention of capital-market investors. Ecosystem businesses, having a close connection to the digital and data-driven worlds, feature valuations based on user engagement and/or top-line metrics.
Ping An Insurance Group Co of China Ltd, the world’s largest insurer, is a prominent example. Besides its traditional financial services businesses, its new, technology-driven businesses are gaining recognition from the capital markets.
OneConnect, the world’s largest financial cloud platform, for example, aims to build financial ecosystems by leveraging financial technology (fintech). Using artificial intelligence, biometrics and blockchain technology, it has established businesses that provide marketing and customer acquisition, product development, risk management, operations and other solutions to banks, insurers and large investors. As of Sept 30, 2018, OneConnect offered fintech services to 483 banks, 42 insurers and nearly 2,500 non-bank financial institutions.
For traditional companies on the defensive, an ecosystem is a way to maintain competitive business positions and withstand challenges from digital rivals — in particular, by preventing customers from switching to competitors.
DBS Bank, headquartered in Singapore, embarked on its digital transformation journey (including ecosystems) inspired by platform players such as Alibaba, Tencent Holdings Ltd. Over the last five years, DBS has invested S$1 billion annually in its transformation, resulting in a substantial increase in digital customers from 33% in 2015 to 48% in 2018.
- Extracted from McKinsey & Co’s latest report entitled “The Ecosystem Playbook: Winning in a World of Ecosystems”.