As we stand on the brink of a new era in business through the proliferation of digital technologies such as blockchain, generative AI, or IoT, the transition from the industrial to the digital age marks an immense shift in how companies create, deliver, and capture value. My recent paper in Research Policy, “Profiting from Innovation in Digital Business Ecosystems: A Control Point Perspective,” co-authored with XXX, explores this shift and explains how incumbents can compete with new entrants in their industry, using the smart agriculture industry as a case study.

Industrial vs. Digital: A Paradigm Shift

In the industrial age, companies thrived by optimizing products based on modular architectures (e.g., cars were designed around modular systems to increase economies of scale) and by leveraging distribution networks (also called complementary assets). Success was largely defined by your position in the industry and whether you had valuable, rare, inimitable, and exploitable resources (remember your strategy class, Porter’s Five Forces and the Resource-Based View?). Fast-forward to the digital age, and the rules of the game have changed.

Digital business ecosystems, characterized by interconnected platforms, services, and technologies, are dissolving traditional boundaries and creating a networked economy where value is co-created across companies and industries. The nature of competition is evolving from linear value chains to ecosystems of collaborating and competing actors (read coopetition).

This is relevant because today’s companies must increasingly integrate their digital reach into their business strategy. While 80% of value in traditional industries still comes from physical products, and 20% from digital services, this ratio will shift in the future, making it imperative for traditional companies to develop their digital business strategy as their cash cows become commodities.

But why is the digital age different?

Physical products are analog, material, and modular. Once produced, they are hard to change. Digital technologies, on the other hand, have special characteristics: they are re-programmable, homogeneous (everything is 0s and 1s), and self-referential (using own data to improve itself). These characteristics are driving three fundamental processes: modularity, convergence, and generativity, each of which is changing the competitive landscape in tremendous ways.

Modularity: The re-programmability and homogeneity of digital technologies makes it easier to integrate and combine components across platforms, as evidenced by the Internet of Things or software “stacks” (e.g., I can turn on the lights at home with my iPhone). This reduces the effectiveness of traditional bottlenecks, enabling agile responses to market demands and much faster replacement of technological solutions.

Convergence: The homogeneous nature of digital technologies is leading to the merging of previously distinct industries. This trend diminishes the strategic value of specialized complementary assets such as distribution networks, as distribution channels are increasingly absorbed into digital services and systems of systems (think of changing the temperature in your home with a voice command via Alexa). The implications for businesses are profound and require a shift in strategy towards leveraging digital infrastructure over traditional assets.

Generativity: The self-referential capacity of digital technologies drives uncontrolled and rapid developments within digital ecosystems, often independent of the original creators. One example is the decentralized development of software through GitHub. This opens avenues for innovation and disruption that cannot be anticipated, heralding the emergence of autonomous systems that evolve and expand without direct oversight.

For organizations, these dynamics underscore the need to move from a reliance on traditional strategies to a business strategy that integrates the digital realm and masters what will determine your future profitability: control points.

The New Kid in Town: Control Points

A key concept that emerges from our research is the notion of “control points”- strategic positions within a digital business ecosystem that allow companies to exert influence, manage dependencies, and capture value. Unlike the industrial age, where control was often tied to physical assets or bottlenecks, control points in the digital age can be technical (e.g., APIs, data) or strategic (e.g., orchestration of actors, customer access).

For example, John Deere leveraged control points such as data analytics and IoT connectivity to transform itself from a traditional equipment manufacturer into a technology leader in smart agriculture. Similarly, in the automotive industry, Tesla’s Supercharger network is an example of a strategic control point that increases customer value and loyalty while creating a bottleneck for charging and data collection.

Insights for Leaders

In summary, the leap into digital business ecosystems requires managers to adopt a new strategic lens, which I will explore in the next posts. For now, consider three key insights:

1.         Understand ecosystem dynamics: Recognize your organization’s role and potential within the broader ecosystem to inform strategic decisions.

2.         Promote adaptability and collaboration: Success in digital ecosystems requires a combination of industry and IT systems knowledge.

3.         Identify and Leverage Control Points: Determine which control points can provide competitive advantage and drive innovation in your context (think “The Next Big Thing”). This is something we will explore in future blog posts.

Coming up

Our study, recently published in Research Policy, aims to clarify the complexities of digital business ecosystems and provide a roadmap for leaders. In a series of blog posts, I translate our findings into practical guidance for navigating the digital age and crafting your digital business strategy.