HOW TO START AN ECOSYSTEM

Proposition 2: Co-opt foundation customers

One is to proactively go out and seek a foundation customer, who will invest in getting the ecosystem up and running. The other option is to create a ‘honey pot’ that will attract a critical mass of customers to the ecosystem.

For an ecosystem to take off and create new value, it needs foundation customers. This is similar to what Jacobides et al (2019) call for when they state that one of the success factors is to build a strong user base. Finding those initial customers, before the ecosystem becomes well established, is one of the most difficult challenges that an ecosystem leader faces.

We saw two ways to overcome it. One is to proactively go out and seek a foundation customer, who will invest in getting the ecosystem up and running. The other option is to create a ‘honey pot’ that will attract a critical mass of customers to the ecosystem.

ARM eventually lost the account to another semiconductor company, but it had made two key advances. ARM had heard from the customer exactly what it needed, and ARM had shown Cirrus the extent of its commitment to building the new ecosystem.

The case of ARM (Williamson et al, 2009) is a good illustration of the first approach. By the late 1990s, ARM had established a large and vibrant ecosystem around its designs for mobile phones. It needed to duplicate this success in other areas, which was a step into the unknown. They wrote down every single market they could think of, and mass storage stuck out a mile at the time, though ARM knew nothing about it.

Given the nine-month product cycle for disk drives, ARM optimistically thought it would take around 18 months to co-opt a foundation customer, work with it, and get the new ecosystem up and running. On the back of some earlier contacts, they approached Quantum. Although it appeared to be interested and short-listed ARM, Quantum eventually chose a Japanese competitor as a supplier for its processors. Undeterred, one of ARM’s product managers, Liam Goudge, moved to the US, and started making phone calls After six months of relationship building Cirrus Logic expressed interest in the idea. But Cirrus Logic was a chip supplier, while the knowledge ARM needed to get the ecosystem off the ground was buried in the makers of disk drives: companies such as Western Digital, Seagate, and Lucent, who were ARM’s customers’ customers.

Fortunately, Cirrus had strong connections with Western Digital. Liam Goudge was able to visit them frequently over a two-month period. He thought ARM had made a breakthrough when Western Digital agreed to evaluate ARM’s offering, the ARM7, for one of its new disk drives. However, hopes were dashed when Western Digital came back with the scores on its evaluation matrix. It recognised that ARM’s design had advantages, but also pointed out that the ARM7 had key deficiencies that would slow the speed of the disk drive, and complicate Western Digital’s product-development process.

ARM was not ready to give up. With the aid of a Western Digital employee who had become a friend, Goudge arranged a meeting between Western Digital’s top management and Robin Saxby, ARM’s then CEO, who committed to fix all problems. ARM eventually lost the account to another semiconductor company, but it had made two key advances. ARM had heard from the customer exactly what it needed, and ARM had shown Cirrus the extent of its commitment to building the new ecosystem.

The R&D team started working on the key technical problems identified by ARM’s potential lead customers. Back in Cambridge, they started assembling the knowledge that ARM had accumulated. With the goal of creating a new ecosystem, they also tried to figure out how to widen the performance beyond Cirrus to meet the requirements of a range of broader applications and other potential partners and customers. Ideas were collected from sources as diverse as a small technology company in Israel and research taking place in New Zealand. Finally, ARM was ready to go back to Cirrus, and one of its OEM customers, Lucent, with a proposal. This time around, Cirrus and Lucent agreed to join ARM’s initiative to kick-start a new ecosystem.

Some 18 months had passed since the initial brainstorming session with Western Digital, and no one knew what the design would look like—yet. It would emerge over time as the partners pooled their knowledge and worked together. However, the foundation customer for the new ecosystem was in place, which was critical to getting a positive-spiral of growth underway.

Another way of recruiting foundation customers is to put in place a ‘honey-pot’. That approach is likely to be more viable when a critical mass of customers is required to get the ecosystem going. Alibaba’s experience when it set out to develop a new ecosystem in financial services through its affiliate Ant Financial provides a good example of how this can be done (Williamson et al, 2014). Alibaba created a powerful attraction in the form of the Ant Fortune app, which was a one-stop portal designed to attract China’s vast population of consumers who had limited options for money management and investment. Available for IOS and Android mobile devices, the app offered an easy way of accessing more than 900 financial products provided by over 80 banks, asset management firms, and Chinese mutual fund companies through Ant Financial’ s collaboration with Fund123.cn. Alibaba ensured that the funds were initially sold on a no-load basis, so users did not need to pay sales commissions on their investments. The Ant Fortune app also attracted customers by providing free stock-market information for the bourses in Shenzhen, Shanghai, Hong Kong and the US NASDAQ exchange.

Next section – Proposition 3 – Develop and share an initial roadmap for the ecosystem

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