As sector borders dissolve, new business ecosystems emerge

The face of business continues to be redefined by digital technology, and on a very large scale, which will mean emerging ecosystems of interconnected businesses will transform how companies serve customers and fulfill human needs. These ecosystems will do away with traditional industry borders, requiring companies to develop partnerships and innovate their value chains. In this episode of the McKinsey Podcast, McKinsey senior partners Venkat Atluri and Miklos Dietz speak with McKinsey Publishing’s David Schwartz about how business is evolving in a world of sectors without borders.

Podcast transcript

David Schwartz: Hello, and welcome to this edition of the McKinsey Podcast. I’m David Schwartz of McKinsey Publishing. Today we’re going to talk about competing in a world of sectors without borders, starting with some new perspectives that explore how much the competitive landscape may change over the next ten years, right down to the very industry definitions and what companies can do to avoid being left behind. Joining me to discuss the issues are Miklos Dietz, a senior partner in McKinsey’s Vancouver office, and Venkat Atluri, a senior partner in our Chicago office. Miklos and Venkat, thanks for joining us today.

Venkat Atluri: Glad to be here, David.

Miklos Dietz: It’s a pleasure. Thank you.

David Schwartz: Venkat, I’d like to start with definitions. “Ecosystems” is one of those words that has been tossed around a lot lately but which can mean different things to different people. What’s your definition?

Venkat Atluri: In a very simplistic sense, David, our definition of ecosystems is a complex network of interconnected businesses that depend on and feed on each other to deliver value for their customers, to the end users, and their key stakeholders.

For example, if you take the Apple app ecosystem, there are some contractual obligations on who gets to use what data and how they’re going to monetize that data, and also how they share the revenues that they get, including the share that Apple gets versus what app developers get. But going forward, we actually think that some of those traditional ways of forming ecosystems are going to evolve.

There could be very loosely defined relationships or contracts between these various parties that form an ecosystem and the definition that we just described. We believe that that’s what’s going to drive a lot of sectors to blur the borders between them.

David Schwartz: Miklos, what are some examples of ecosystems that you expect to emerge by 2025, and what characteristics stand out?

Miklos Dietz: Increasingly, when people are looking at housing in a digital way, they are looking at one integrated journey through which they can look for places, buy a house, get a mortgage, home insurance, moving services, refurbishing, and then potentially also find somebody to sell to, or go to a reverse-mortgage structure, or sell and lease back, that is, almost everything related to buying and owning a property can be in one ecosystem.

The same housing ecosystem is also connecting concierge services, technology, and house servicing, from plumbing to even updating the latest technology. We are seeing an ecosystem emerging around mobility. Everything that is about buying a car, owning a car, sharing a car, getting somewhere.

We see an ecosystem emerging not just in the retail world but also in the wholesale world, like B2B services or accounting and banking services collapsing together with administrative services, sales management, retail, and other types of professional services. In the end, these are examples, and there can be very different outcomes in different countries in different parts of the world, but most likely, they will emerge around the basic needs of individuals or organizations.

David Schwartz: Sure. And business segments and industry categories have always shifted and evolved in the past. Venkat, what’s different about the dynamics that drive sectors without borders?

Venkat Atluri: There are three things that give us quite a bit of excitement in terms of how the sectors are evolving with respect to their borders. The first thing that’s different is technology has been around for a long time. Technology has always found a way to disturb the way things get done in business and otherwise.

We’re seeing a growth/exponential effect on what technology could do for a player in one sector to go and capture value beyond their own sector. A good example of that would be the ability to go buy compute power, the ability to go buy compute storage. Not too long ago, that wouldn’t have been possible for a start-up or even a medium-size company unless you spent a lot of money. Now you actually can buy that on a per-use basis. That’s quite different now versus five or six years ago. We continue to think that that’s going to get cheaper, better, more accessible.

Second thing, which is the by-product of that, is that’s driving the pace of change and accelerating the level of innovation, a level of potential for value delivery, a lot more than we have ever seen before. The effect of acceleration that the technology and data availability is having is really unprecedented.

The third thing that also creates quite of bit of excitement is customer expectations. Consumer expectations have evolved to a point where they’re expecting you, as a provider of goods and services, to know what their needs are and serve those needs proactively.

Miklos Dietz: If you’re comparing this historically, yes, there have always been industries merging. In addition to the big difference in speed, as Venkat was referring to, there is also a big difference in terms of the “winner takes all” nature of this transformation.

In digitally driven future ecosystems, the orchestrators—the operators who own the data and therefore can be the first touchpoint and define what a customer gets and when and how—they will have disproportionate power over the whole value chain. So we are not just seeing value chains merging faster than ever before, but also the shift of value across these value chains is much faster than what we have seen. This creates a huge challenge for any company or organization who is involved in serving clients or distribution, because it requires them to reinvent their strategy at a much faster speed, looking at a much broader horizon than ever before.

David Schwartz: Let me drill down a little bit on that. One way we can begin to conceive of sectors without borders is that we’re seeing ecosystems already set in motion by the digital powerhouses. But, Miklos, what do the changes mean for nondigital players? Are they destined to play second fiddle or be eclipsed entirely? Can they orchestrate their own ecosystems?

Miklos Dietz: That’s a brilliant question. First and foremost, I am not sure that there will be purely nondigital players. I think there are many businesses that are mainly focused on physical distribution or have important physical assets, but probably all businesses that are serving clients will collect the data and will at least partially serve customers or drive customer processes digitally. It’s going to be less about digital versus nondigital and more about already advanced technology platforms compared with incumbent industries and more traditional business models.

If you ask it like that, I’m actually quite an optimist. I think that the future of these ecosystems has not been defined yet. Large incumbent businesses have plenty of competitive advantages from trust, brand, data, and capital to be able to shape the emerging future of ecosystems. They can become crucial partners. It really depends on whether they are fast enough reinventing their business models and realizing that they are not just playing in their little industry anymore, but in a very different and much broader universe.

Venkat Atluri: If you take a look at the world of digital versus nondigital—and I agree with my good friend Miklos that there’s no such thing as nondigital going forward 10, 15 years from now—but for argument’s sake, if you just say that that’s the way the world is today, the so-called nondigital players have some critical assets, and Miklos mentioned some of these. But to add to that, there are things like customer relationships, things like channel relationships. Those are very, very hard for the broader digital players to reestablish or put in place. That is going to help the so-called nondigital players quite a bit, to cover their position, and I’m equally as optimistic as Miklos on their potential to take advantage of these sectors-without-borders friends.

The second point is, what is going to be a very interesting challenge for these so-called nondigital players—the currently nondigital players—is whether they will be able to take advantage of these technologies and be able to take advantage of the trends. They have to work hard to change their DNA.

David Schwartz: Obviously, when we’re talking ten years out, it’s hard enough to describe what’s going to emerge, let alone how many, but I’ll go ahead and ask. Approximately how many large ecosystems do you foresee?

Miklos Dietz: We foresee one scenario when the current more-than-100 different value chains and industries which constitute the distribution of services and goods in the economy would collapse into just 12 large ecosystems. And obviously this is just a scenario: 12 large ecosystems that would connect practically all activities of one type—buying product, health, education—into a very, very large industry group. It would be multitrillion-dollar-large ecosystems with a few large orchestrators, big winners, and a huge shift of wealth and value creation.

Obviously that would be just one stage. There are industry thinkers who are arguing that in the long-term future, there would be just one or two ecosystems. One B2C and one B2B. So maybe there are further stages of evolution, but at least these 12 are ecosystems we are already seeing emerging.

David Schwartz: You had mentioned multitrillion. To drill down on the metric, how large are we talking about in terms of economic profit? And what does that mean if we were to put it in perspective to the economic profit that we see among industries today?

Miklos Dietz: We are speaking about a historically unparalleled scale of value creation and economic profit shift. If we are looking at 2025 numbers, we would see the total revenue covered by these large ecosystems being over $60 trillion.

The actual economic profit in this system would be over a trillion dollars. It’s important to say that the trillion dollars should not be compared to accounting profit. This is just the economic profit above the cost of capital earned by companies. It is what drives the value creation of new sectors, new industries.

Venkat Atluri: Just two other things to add to what Miklos said. One is just to put things in perspective: the $60 trillion that he quoted is roughly one-third of the total revenue pools that are projected to be in the global economy; the total revenue pools are about $190 trillion. So it’s one-third that’s going to be affected. That’s an interesting comparative statistic.

The second point is the $1 trillion economic profit that Miklos mentioned. It remains to be seen how that’s going to get redistributed. Some of us believe that it’s going to get competed away or get in the form of consumer surplus, for example. Some of that is obviously up for grabs for innovators and existing players to capture, redistribute, or reinvest.

David Schwartz: Let me touch on the most important technologies to survive and thrive in a world of sectors without borders. We had mentioned, to some extent, mobile. Venkat, could you run through what you think are the most important technologies going forward?

Venkat Atluri: The way I would think about that, David, is there are the macro technologies we all talk about. Undoubtedly, they’ll have a significant impact on how the borders for sectors are going to be shaped.

These would be artificial intelligence, advanced analytics, and the whole macro sense of mobile—not just mobility from a vehicle and people standpoint, but the mobile Internet and so on and so forth. But there are some very interesting underlying micro trends that are enabling these ecosystems to form and thrive.

I’ll just give you one example. Of all the things that we talk about and we think about the API [application-programming-interface] approach, the approach of, “You may have your own data system with company A, you may have a data system with company B, and a different data system with company C,” but with the API-type approach, where one can share data across those three company platforms or one can share analytics-based across those three platforms. Or one can share the actions that you could take across those platforms to APIs. I think those are the kinds of enablers that are driven by these technologies and are going to make a big difference for us.

David Schwartz: And how about the human side, Miklos? With technology such a game changer, what part will emotional connections, such as brand loyalty and trust, play in the mix?

Miklos Dietz: I would argue that this is not just about technology. The real reason why we are seeing the acceleration of sectors merging into each other—borders between industries going down and emerging ecosystems—is because of this extraordinary combination of supply and demand meeting.

The supply is technology, which Venkat has described: radical changes to the cost of computing, mobile access, big data. But the demand side is human. It is actually a natural human need, which is evolutionarily programmed into us and has always been in our brains, that we want things immediately. We don’t want to hustle. We want to maximize enjoyment. We want to get things ideally as easily and as simply as we can.

In this respect, what happened was that this technology is finally ready to realize deep, human need, which we had and our grandmothers had when they were waiting in huge lines in the post. They also wanted email. They just didn’t know that, and at that time, it could not happen.

Now, of course, it is a more nuanced game, and of course your question has a lot of merit because technology changes human behavior and human expectations, willingness to wait, and how humans are being influenced. They already see radical changes in how people are collecting information, how people are making decisions, how people are defining their views, whether it’s economic or political. And there is no question that these emerging ecosystems will further accelerate these changes. But these changes are still not inhuman. It is just a different way of serving deep, human needs.

David Schwartz: Very interesting. Venkat, how should a CEO think about what’s needed to compete in a world of sectors without borders? And what are some immediate to-dos?

Venkat Atluri: The way CEOs have to think about sectors without borders and the ecosystems that are involved and how to leverage them, really comes down to the mind-set. Having the mind-set that the sum of the parts is going to be larger than the parts themselves.

And if you have that belief, you may rethink everything that you do in your business. For example, if you’re a player that’s making widgets, but the widgets can offer a bunch of different services beyond the widgets, who are the other players that you could go and work with to deliver something more than just a widget could do for a customer.

Second, not in any particular order, it’s also very important to use data, follow the data, leverage the data. And it may not be the data that you have. It’s the collective data that you could get access to. The data from you, your partners, your suppliers.

And then, third, it also is very important to establish, and we mentioned this earlier in the discussion, establish a strong connection to the end users and customers. Sometimes you get to own it. Sometimes you get to share it. And sometimes you get to depend on somebody else to give you that access. Nonetheless, having that strong tie with the customers and the end users and leveraging that is quite important. By the way, what level of customer intimacy you have, whether you own the customer, whether you share it, or you leverage somebody else’s, also determines what role you play in the ecosystem.

And then, last, a lot of times we see companies’ management teams and CEOs get very excited about going and striking partnerships. And some of that is good. But we urge CEOs to think less about just the one partnership, and more about what’s the ecosystem you are building with their partnership mind-set. And what role are you playing?

Miklos Dietz: Your question was also very much focused on the short term, right? Nobody can know the future. And you cannot ask a CEO of an organization to look into the future with 20-20 foresight and explain, “This is exactly what our business model will be.” That is just simply not an option.

I think, however, there are certain extremely practical things everybody needs to consider. The most important is to make sure that at least every large organization and medium-size organization has a vision of how the future will look when competition will come from other sectors, when instead of individual industries, there will be larger ecosystems.

Let’s at least make sure that any organization has a global vision of which business models are working and which are not. Let’s at least make sure any organization has enough adaptability in the strategy, in IT, in operations and processes that make much quicker directional changes possible. This will be a very exciting, but also highly challenging time to steer and navigate a company through such changes.

David Schwartz: Let’s talk about a partnership paradigm. We’ve been discussing partners and the ways in which one can reach across and interact with those who may not necessarily play within their space. One of the instincts when there are major changes on the horizon is just to open up your checkbook, as it were. Miklos, understanding that every case is unique, what’s your perspective, as a general matter, about partnering versus acquiring?

Miklos Dietz: This is not necessarily a binary. We are seeing much more nuanced and more continuous space evolving with exclusive partnerships, joint ventures, joint businesses. I think it’s a more complex universe which companies will have to navigate.

For sure, though, and I think your question is brilliant because companies will have to be very careful not to try to spend their way out of this. The emergence of ecosystems does not give justification to start to build huge conglomerates of unrelated businesses. In fact, what we increasingly see is the value goes to asset-like orchestrators.

Many of the biggest winners are companies which are in the middle and connecting the dots. One thing which people have to be very careful about is not to translate this into holding building, but more about reinventing the business model and reinventing how the customer value proposition is being created.

David Schwartz: Terrific. Miklos and Venkat, thank you both. For more about sectors without borders and competing in that world, we invite everyone to please visit McKinsey.com.