The Battlefront for the Keystone Position in an Ecosystem

Direct competition between ecosystems – iOS vs. Android; Twitter (or "the X"*) vs. Instagram (Meta) – is often studied and constantly the subject of various tech press and opinion pieces. There are many good reasons for this that all analogize to the same reason journalists love to cover competitive tournaments:

  1. you get to pick sides
  2. you can easily keep score of who’s winning and losing
  3. there’s no debate on who’s competing; and, most important
  4. the stakes feel existential

There’s another form of ecosystem competition, however, that is covered far less, but feels similarly existential: the battle to be the keystone within the same ecosystem.

In this view, competition is around which parts of a user's or enterprise's technology "stack" can be the go-to solution for the "jobs to be done" (e.g., finding what you want online; storing invoice information for a company; etc.). In this view, competition is not head-to-head; it's indirect and often non-obvious. In the consumer world, Amazon (an online retailer?) and Google (a search engine?) often compete actually over who “owns” your search job-to-be-done; it’s between Gmail and WhatsApp over what it means to communicate with friends. In short, direct competition (email vs. email) gives way to competing to solve a consumer's need (communications).

One of the most interesting cases is the enterprise battle between “systems of record” – which are technically your trusted databases. In strategy terms, these are also the stickiest, typically highest-margin, systems in your tech stack. Battles between systems of record have a rich and storied history. Recently, a colleague and I were emailing about the diligence of a company that has a niche product selling quite well in the crowded healthcare IT space. The company’s strategy includes an expansion toward a broader integrated offering across a space that includes roughly 5 previously separate systems (i.e., a series of battles to be won across the ecosystem). Multiple companies within each of those 5 spaces also appeared to be following a similar consolidation strategy – and the key diligence question was, how will this play out?

In these scenarios, we take two commercial diligence steps:

  1. reason by analogy
  2. test the analogy for validity in the market

First, reason by analogy:

One analogy that is commonly cited is the battle between CRM, Marketing Automation, POS and ERP systems: all have been building capabilities that increasingly overlap with each other and, as they do, they often seek to deeply integrate each of those capabilities. They integrate in part for a customer value reason: usually there is some unique scenario they are looking to unlock with the integration. For instance, a CRM can tie inventory management and customer orders up against the actual customer engagement records, which give great visibility for the sales and service orgs on order fulfillment, etc. Alternatively, ERP systems are often used by sourcing orgs and, therefore, having inventory and order management tied with them really helps with forecast. So, both packages have a legitimate claim on owning order management.

Of course, providers also link their capabilities from a strategic point of view to create greater lock-in – a key attribute for any software play – SaaS or otherwise.

Second, test for validity:

In this analogy, we can see there is swift and intensely competitive consolidation in each of the respective spheres – i.e., ERP and CRM markets each rapidly add capability and share through both product development and acquisition. Essentially, each of the leaders in CRM and ERP starts “feeling the heat” from the adjacent spaces and – I think – often overinvests in building out their portfolio hoping to beat the other adjacent market leaders to the punch. As the “table stakes” for the markets gets raised, it makes it increasingly difficult for smaller, focused players to compete – raising the barriers to entry.

Limited middle ground:

In these situations, there is not typically a middle ground. Having a clear, informed view on the trajectory in that consolidation is essential to properly forecasting future category penetration (and thus, revenue) and properly evaluating risk, and ultimately for long-term value generation. The core questions for understanding an ecosystem consolidator's prospects are utlimately:

  • Do you believe that this company is positioned to be the acquisition target in their category?
  • And if not, do you have the ambition and capital to be the consolidator?

*This article was updated in 2023 to reflect platforms like X and Meta.

Copyright © GRAPH Strategy LLC