Previously in this module, we have discussed the business ecosystem metaphor. Business ecosystem provides a powerful lens to grasp the increasing importance and complexity of company to company relations in digital industries. In this lecture, we're going to shift the focus to technology ecosystem. We're going to look at technology ecosystems in relation to the positioning within business ecosystems. We're going to examine how decisions of compatibility to find a position where we aim to compete, and also how we can use technology to build or sustain that position. The key takeaway from this lecture is simple yet complex. It is simple in that insight should be that any decision about compatibility, it's also a business strategy decision. When someone at a company takes a decision that a service should interface to another service or that an app should be released on this or that platform, then it is also a business decision about market position. This broad argument is simple but underlying explanation is rather complex. Understanding the impact of compatibility decision on a level that goes beyond the general view that technology matters, requires us to dig deep into strategic literatures on market collusion and the technical literature on technology ecosystem. Intersecting these literatures, we can explain not only that technology decision matters in general, but also how it matter when companies are navigating between different business ecosystems. Let's start in a technical end. What is the value of a mobile payment app if it only works on phones with Windows 10? In the digital world, one of the key features about competition is that digital technologies are useful when they exist in systems of compatible technologies. Compatible technologies create technological ecosystems. For example, around the iOS, Apple has built a technological ecosystem that includes devices such as the iPhone, iPad, iwatch and itv. It also include supporting services such as the airport routers and Time Capsule backup sever. And it includes add ons, tunnels, screens, bags and other things that enhance the device. The technology ecosystem also includes compatible third parties support services, devices and add ons. Just as for a business ecosystem, it's sometimes hard to draw the line for where the technology ecosystem ends. A Microsoft computer can for example use the basic Wi-Fi functionality of the apple routers, but does that make it part of apple control technology ecosystem? Well, the Wi-F protocol is not controlled by Apple. So we should probably think about this as another technology ecosystem that extends over some Apple product. In other cases, it's clear where the boundaries are and when something is on the inside of an ecosystem. When Samsung makes their wireless speaker compatible with Apple's airplay protocol, Samsung is clearly making its speaker part of the Apple control home entertainment ecosystem. Let's stop for a second to recall that I said that this decision of compatibility is not only a technological decision, it's also a business strategy decision. It is a business strategy decision because a critical implication of Samsung's decision to make the speaker part of the technological ecosystem, is that Samsung joins the Apple ecosystem. Now as we've previously learned, Samsung is then adding a collaborative relation with Apple. In this way, Samsung becomes exposed to Apple's way of governing its business ecosystem around home entertainment with all that this implies. To fully understand what Samsung's compatibility decision means, we can turn to the part of the business strategy literature that deals with market collusion. This literature analyzes how companies are positioning themselves relative to other companies in an industry, and it can help us to grasp the effects of compatibility decisions. The basic idea of the market collusion literature is that the position a company has in an industry greatly impacts its profitability. In some industries, no companies makes any profit at all. In others, one or a few firms takes all the profit, and yet others, profit might be distributed almost equally among all firms. To us, thinking about position means that we have to be aware of in which a ecosystem we position in and the position we have in that specific ecosystem. In the digital finance industry, to understand market position, we need to separate between the individual and ecosystem levels of market position. At the individual level, we have individual companies that compete with each other in the same ecosystem. At ecosystem level, we have the competition between business ecosystems. If we turn to the technology side again, we actually have a corresponding structure of technology. We have individual technological components that each has unique properties. We also have technology ecosystem where the components form systems that presents unique characteristics in itself. The point here is that, with any decision about a digital product or service, a company in a digital industry is making a decision on where in this two-level structure to position a product. To make these concrete, we will once again return to our example of City pay. When Citibank is introducing the city pay app, this is the decision to be in direct competition with banks such as Bank of America and Capital One that also have the respective payment apps. Here, the apps compete directly to design the features of their respective apps. When basing the city pay app on the master path technology, Citibank is also making the decision to join the ecosystem of companies that collaborates around the master path solution. At this level, Citibank, as part of the master path cluster, is now competing with similar business clusters based on technologies developed by Apple, visa and others. Here, the technological competition is between systems of technologies. For example, through the numbers of point of sales enabling payments with the respective systems. So, to sum up, through its technological compatibility decision, a company in a digital industry is making the decision of which market position the company is aiming at. With these two levels of technological competition, we can now also examine how technology can be used to create or sustain market positions. In the game of market positions, technology can be used both defensively and offensively. The defensive, Build-And-Defend Strategy, is based on the logic that access to technology can act as a defense for a particular market position. For an individual company, the most profitable position in a market is when the technology somehow can grant the business unit monopoly position that allows one-sided decisions on pricing. There are two ways technology can create such positions: by level of capital investment and by technological access. For example, the banks and payment card provide us a bit large interbank transfer systems and card clearing systems that are the basis for payments. These investments signal commitment on the part of existing actors to defend this market. So beyond the huge capital investment needed to build a similar network, the expected commitment, a fierce resistance might be enough to scare off competitors from approaching the industry of interbank transfers. Access to technology can also act as a barrier. Some technology is proprietary unique to an individual firm or to a small cluster of businesses. Establishment of de facto standards and technological patents are well established strategies to protect the firm's market position in a digital marketplace. Here the network effects that we talked about previously are extremely important because to make a technology a de facto standard. Digital technology can also be used in offensive strategies as a battering-ram. There are many examples of how new competitors have drawn on disruptive technological innovations to penetrate or bypass existing ecosystems. For many low cost allies, for example, the use of internet for ticket sells enable customers to bypass an existing potentially impeding ecosystem of incumbent airlines and travel agencies. This also enable the new entrants to lower the total operating cost of issuing and handling tickets. For the new entrants in an industry, a decision to use technology as a battering-ram for market entry is essentially a decision related to the level of technological compatibility. The first option is to attempt entry with a technology that is compatible with existing technologies. You then compete with other companies that provide similar products or services. Payment card readers from Square or iZettle, that seeks to establish collaborative relationship with stakeholders that control ecosystem technologies, and competitive relationships with ecosystem stakeholders who are providing similar products and services. In this option, you bet on that component by component your solution is the better. The second option is to enter through technology that involves incompatible or close to incompatible technologies that are based on new technological regimes. In payments, bitcoin has opened up for a new type of competitive regime that bypass much of the existing members of the payment ecosystem. So, to sum up, in the digital world, technology strategies is inseparable from business strategy. The simple take away from this lecture is that technological compatibility matters for how a company positions itself relative to business ecosystem. The more complex takeaway is that compatibility is enacted at different levels: individual and ecosystem. Technological compatibility therefore impacts business strategy at those different levels. Technological decisions are defining in which market position we aim to compete. Technological decisions are also defining how we compete for this specific position.
