This is the second part of a series on Platforms, ecosystems and product management. If you haven’t read the first one, you can find it here.

As we discussed, platforms and ecosystems go hand-in-hand. In fact, without one, the other doesn’t make much sense. According to “Platform Revolution: How Networked Markets Are Transforming the Economy―and How to Make Them Work for” an ecosystem is “A network of enterprises, developers, third-party providers, and end-users that interact to create new value and serve a target market.” As can be seen, this definition is very similar to that of a platform, and these terms are often used interchangeably. However, the two are not the same. Ecosystems have a broader reach than platforms, and they can potentially comprise multiple platforms working together. In some ways, an ecosystem for a platform is like an operating system for hardware. Without an operating system, the best hardware cannot create value, and without scalable and secure hardware, an ecosystem cannot scale.

There are several reasons that ecosystems are important to today’s business world:

• Collaboration and co-creation: Ecosystems allow enterprises to collaborate toward a shared goal that cannot be achieved individually or is very expensive to achieve.
• Increased customer reach: Ecosystems can help companies reach new customers by tapping into each other’s customer base and distribution channels, resulting in the expansion of customer base for all participants.
• Shared resources: Ecosystems allow participants to share resources such as data, services, and infrastructure, resulting in cost reduction.
• Network effect: Ecosystems can create a network effect where the value of the ecosystem increases as more participants join, creating a virtuous cycle of growth.
• Disruption: Ecosystems can be used to disrupt traditional industries and business models by offering more efficient, convenient, or innovative alternatives. Disruptive ecosystems can create new market opportunities and challenge established players.
• Customer experience: Ecosystems can enable companies to deliver a more seamless and integrated customer experience by integrating products, services, and experiences from multiple participants.

Overall, ecosystems are an essential component of modern business strategy and can provide significant benefits to participants.

Building an Ecosystem

Building an ecosystem is not an easy feat. In fact, building a successful ecosystem that can stand on its own and enter the virtuous cycle of hyper growth is one of the more challenging endeavors that companies tackle. This is evidenced by the number of ecosystems that have failed or not achieved their intended goals. Even a company like Google, which has had great success in building some of the best-known ecosystems like Android, has had its share of expensive failures in this domain, such as Google Wave, Google Buzz, Google Glass, Google+, and Google Allo. Each of these was created as an ecosystem but failed to gain traction for various reasons beyond the scope of our discussion.

There are steps that, if taken, can increase the chances of success. Here are some of those steps:

• Define the ecosystem vision: A clear vision for the ecosystem must be defined, covering market opportunity, the value proposition for customers and participants, and the key stakeholders of the ecosystem.
• Strong technology platform: The underlying technology platform must be robust enough to enable participants and third-party developers to build and integrate their products and services without too much friction. This covers all that we discussed in the platform part.
• Build partnerships and cultivate relationships: Companies must build strong relationships and cultivate a culture of partnership with other participants. This may involve reaching out to potential partners and defining the clear value that the ecosystem will bring to them.
• Focus on collaboration and innovation: Participants in an ecosystem must have an innovative approach and creative ways of addressing challenges and creating new values. This can be encouraged by providing incentives for collaboration and innovation.
• Develop governance and standards: All participants must adhere to a shared set of rules and standards for the ecosystem to succeed, and there must be governance to enforce these standards. Topics such as policies around data privacy, security and interoperability, as well as creating a dispute resolution mechanism and decision making, are important.

While these steps do not guarantee the success of the ecosystem, they can increase its chances. There are many other things to consider when building an ecosystem, though.

Nestle — an Ecosystem Success Story

One of the textbook examples of a successful ecosystem is the one created by Nestle around their Nespresso coffee.

In the early 1980s, Nestle recognized an opportunity to offer a good coffee experience to coffee enthusiasts, both at home and in the office, without the need for frequent trips to coffee shops. Nestle realized that it could leverage its expertise in the food market, especially in coffee, to increase its chances of success in this market.

It launched its Nespresso brand in 1986. Nespresso is a system for making high-quality espresso at home using a single-serve coffee pod. The Nespresso system was designed to be simple and easy to use and it quickly gained a loyal following among coffee enthusiasts who appreciated the quality and convenience of the product.

However, Nestle realized that this product was facing several challenges. The coffee pods were expensive, and the machines were not widely available. Nestle recognized that it needed to build an ecosystem around Nespresso to create a sustainable business model.

To do so, Nestle focused on three key areas:

• Product innovation: Nestle invested heavily in improving their coffee, making it more consistent, and creating new blends. Additionally, Nestle developed new machines and accessories such as milk frothers and storage containers to enhance the user experience.
• Distribution: Nestle built a network of retail stores and distributors to make Nespresso machines and pods more widely available. The company also created an online store and subscription service that enabled customers to order pods and accessories directly. To make the machines available, Nestle partnered with manufacturing companies to build different parts for its design and provide them to the market, incentivizing these participants in the ecosystem to engage, create value, and bring innovation.
• Customer engagement: Nestle worked to create customer engagement by creating a network of Nespresso enthusiasts through customer service and hosting events and tastings. The company also launched a loyalty program, Club Nespresso, that offered exclusive discounts and benefits to members.

To build such an ecosystem, Nestle followed the steps mentioned above:

• Define the ecosystem vision: Nestle’s vision for the Nespresso ecosystem was to create a premium coffee experience that could be enjoyed at home or in the office. The company recognized that there was an opportunity to create a new market for high-quality coffee products that were convenient, accessible, and engaging for consumers.
• Strong technology platform: Nestle developed a proprietary technology platform that enabled consumers to brew high-quality espresso at home using a single-serve coffee pod. From building online and retail stores to investing heavily in developing new machines, capsules, and accessories to enhance the user experience.
• Build partnerships and cultivate relationships: Nestle built a network of retail stores and disruptors to make Nespresso machines and pods more widely available. The company also formed partnerships with other coffee companies such as Starbucks to produce Nespresso-compatible coffee pods to access a larger customer base.
• Focus on collaboration and innovation: Nestle fostered a culture of collaboration and innovation by investing in product development, customer service, and community building. By involving technology companies, Nestle has been able to create more innovative machines and reduce the price of those machines to make them more accessible.
• Develop governance and standards: Nestle has put in place a strong governance system for its Nespresso pods and machines to ensure consistent quality across its ecosystem. Additionally, it has more than 1,700 patents for the Nespresso pods and machines and has taken legal action to protect its intellectual property in the past.

Today, Nestle‘s Nespresso ecosystem is generating billions in revenue and showing strong year-over-year growth. In 2020, Nestle reported that its coffee and beverage business had total sales of approximately USD 19.2 billion, representing a 1.9% increase YoY growth and attributed this growth to strong performances from Nespresso and Starbucks-branded products.