Digital ecosystems have enabled new business models to emerge: an unprecedented opportunity for SMEs to grow and increase competitiveness.
France has significant and almost untapped economic potential in the field of digital ecosystems. French small and medium-sized enterprises (SMEs) hold all the cards to take advantage of this new economy and grow significantly.
Digital ecosystems are characterized by multiple stakeholders and interactions, thus offering French SMEs many business opportunities.
French SMEs would therefore do well to position themselves in this booming economy and seize the opportunities available to them.
However, doing this requires understanding the challenges of digital ecosystems and being prepared to rethink the very basics of the way we’ve always done business.
1. What is a digital ecosystem?
Digitized business ecosystems – or digital ecosystems – have become essential over recent years, but they’re still very poorly understood; they are also considered, wrongly, as the prerogative of start-ups or digital giants.
By means of increasing connectivity, adoption of the cloud, data production and the advent of platforms, companies can now leverage resources from outside their organizational boundaries; this includes their competitors, to create and deliver solutions, and to capture or create new markets. In this way, they move from a role as participant (or producer) in an ecosystem, to a role as coordinator of an ecosystem: from the linear economy, to the collaborative (or network) economy.
2. A tremendous opportunity, still untapped by SMEs
This economy of digital ecosystems is not a minor detail: according to the WEF, 30% of global revenues will be generated by platform businesses by 2025.
Nor is it an inevitable danger, but a tremendous opportunity to rely on the capabilities and assets of our SMEs, to innovate and remain competitive in Europe. This is true for B2B, B2C, G2C, etc.
3. Europe is a long way behind
However, there’s everything to play for in Europe, especially on Tech-for-Good and Greentech ecosystems: for the moment, the USA, Asia and FinTech dominate the global platform economy.
The good news is that it’s not inevitable and, quite the opposite, there’s still time to get in the race.
4. Why are SMEs particularly well placed to grasp these opportunities?
Digital platforms are not models reserved for technology or digital businesses, quite the reverse.
But we still have to understand their very specific mechanisms and avoid the shortcuts and amalgams afflicting this new economy: in fact, who isn’t talking about platform or ecosystem, marketplace, e- commerce or SaaS at the moment? All these terms are used interchangeably, quite wrongly.
Reason 1: Mechanisms
Digital ecosystems work very differently from the linear models that have experienced it. A platform business that coordinates a digital ecosystem can actually create value on four levels: the more it works these different levels, the more competitive it will be, the more difficult to copy, and the more value streams it will have to monetize.
- The 1st layer (ecosystem) creates value by generating a positive impact on society and our planet (environment/nature/culture/social). Impact that should be measurable (e.g. Vinted or Too Good To Go).
- The 2nd layer (connections) creates value by connecting supply and demand, and by promoting interaction and joint value creation (this is the essential layer of marketplaces such as Leboncoin or Booking).
- The 3rd layer (intelligence) creates value by connecting data sources and supplying them information to trigger positive behaviour. It can also provide incremental services to one or more of the stakeholders (e.g. Doctolib is working on a SaaS – Software as a Service – for medical practices, in addition to the marketplace layer around the doctor’s appointment).
- And finally the 4th layer (infrastructure) creates value with physical and/or digital assets to support the upper layers (e.g. Backmarket works with repackaging plants and Amazon relies as much on AWS as on its logistics power).
The above B2C examples provide a good understanding, but the 4-layers theory is absolutely identical for B2B or any other type of platforms.
Working on the four value creation layers therefore increases the resilience, competitiveness, business potential and growth of a platform business.
However, 94% of European platform businesses only work on one or two of them, most frequently Marketplace or SaaS (research conducted by Fastbreak One in Europe on over 200 platforms in 2021). This is not only inadequate but leaves them exposed to competition; it is also generally difficult to derive a Return-on-Investment from them, because the “connections – marketplace” layer on its own is often difficult to monetize.
However, SMEs have huge assets, underutilized in the platform economy. These assets could actually serve the “data” and “infrastructure” layers: a considerable advantage in this platform economy. And I mean “assets” in the broadest sense: human, physical, financial, property, IT, etc.
Reason 2: Nature of SMEs
The second reason that puts SMEs ahead of large groups and start-ups in terms of opportunities in this ecosystem economy is their very nature:
- SMEs are much more agile than large companies.
- They already have customers, and sound expertise and market knowledge compared to a start-up.
- They are led by entrepreneurs: this is generally not true for large groups.
- They are often much closer to their customers than large groups.
- They are more realistic about their level of expertise on new subjects and are therefore more easily prepared to work in partnership, without necessarily seeking monopoly.
- They often have a more neutral (less dominant) image than that of large groups: this is a huge asset in terms of trust when you want to coordinate an ecosystem.
5. Quick glossary
Digital ecosystem: a digital ecosystem is a set of stakeholders participating in a user path and coordinated by a digital platform.
Digital platform: IT infrastructure of a platform business.
Platform business: a business that operates a virtual and/or physical location to assist two or more different groups find each other, jointly create, interact with each other and exchange value. Its role is to facilitate interactions, connect supply and demand, and to coordinate, organize or create ecosystems.
SaaS: Software as a Service, cloud-hosted. This software can be a linear business (the company sells in the form of a subscription to numerous users – from one to many. Or it might represent the “intelligence” layer of a platform business and take part in coordinating a digital ecosystem – from many to many).
Marketplace: digital marketplace relying on a digital platform to coordinate supply and demand; often operates without the other three value layers.
E-commerce: online trade, whether linear (sales site, SaaS) or ecosystem (marketplace, platform business).
6. Conclusion: barriers we erect ourselves
General confusion
Beyond the many misinterpretations on the terms, SMEs think they have to completely redefine the scope of their business, and that’s not so: this is not about digital transformation but entrepreneurial action to accelerate and protect past business and to boost growth.
It’s really a matter of increasing (or creating) a revenue share based on transactions – in parallel with and to complement that based on sales of products or services.
In addition, most of the time SMEs compare creating a platform to creating a product line: it’s very different, and much closer to creating a new company, intended to operate alongside the historical business. The aim is to create a new business model alongside the existing business model, in conjunction with and accelerating the historical model.
As a result, it takes longer, because you have to create a whole new business and rely on network effects for growth; but the benefits are also much greater, whether for the historical business or for the new one.
For example, let’s take Hagedorn, a German SME working in construction and construction sites. In 2006, Mr. Hagedorn founded the family-owned SME Gütersloher Wertstoffzentrum GmbH to recycle construction rubble; in October 2011 he created Erdbau-und-Erschließungs GmbH for civil engineering. In 2013, Revital GmbH focused on the restructuring of brownfield sites. In 2016, the Hagedorn Group launched an online platform Brownfield24, which connects sellers and buyers of industrial and commercial brownfield sites. Then another platform called Schüttflix was set up in 2019: using their operational market knowledge, they’re creating a quality service to deliver materials to the right site, to the right place, at the right time and in good condition. Service that can benefit both their historical business and their entire B2B ecosystem.
The Hagedorn Group is now a company with more than 500 employees, turning over €232m. It therefore relies as much on linear business models as platform models: a so-called “ambidextrous” company.
Money!
When it comes to finance, the most critical is the seed funding for the project: once you have launched a platform that works with its first paying customers, investors will come running.
And SMEs are often quite well placed there too: they may have access to funding much more difficult for start-ups to source. Funding may come as equity, debt, or even through access to French or European funding programmes, many of which grant generous funding, subject to conditions of a certain contribution or turnover: start-ups generally don’t have this favourable financial history, nor the cash flow needed to offset the delays inherent to these programs.
Investment funds, on the other hand, are quite cautious about seeding and prefer to invest when there’s already a product and first customers with a recurring turnover. One option to safeguard its seed and growth funding strategy is to collaborate with a venture studio.
Know how to rely on other expertise
Culturally, SMEs know their limitations and are used to seeking help or resources outside the organization. And in the present case, several areas of expertise have to be sourced: expertise in modelling and creating a platform business, expertise in seed funding strategy, etc.
In conclusion, Europe holds a very good hand in this new economy of digital ecosystems thanks to the assets and entrepreneurial culture of its fabric of 22.6 million SMEs: a tremendous opportunity to innovate and take advantage of this new economy, but also an opportunity to support and strengthen European SMEs.
www.flyingrhino.io
By Nathalie Dumas Lamborghini, Founder of Flying Rhino, the venture studio dedicated to platform businesses with impact.