Ecosystem resources for development and cost advantage

– by Hamsa Thota –

In this article Dr. Thota discusses how SME leaders can utilize ecosystem resources for enterprise development and growth. SME leaders can leverage professional services available from intermediary organizations in the ecosystem to develop substantial solutions to customer needs. By learning to systematically mine key resources SMEs can achieve twin goals of sustainable development and cost advantage.

The ecosystem provides economic coordination and enables SMEs to compete against larger enterprises both locally and globally. SME leaders can learn how to systematically mine financial resources and utilize services of intermediaries to develop substantial solutions to customer needs. Ecosystems contain resources such as the accelerators/incubators that enable startup entrepreneurs to turn their ideas into enterprises; networks that facilitate connections between small and large enterprises, economic development agencies that connect universities and vocational educational training institutions to train qualified workforce and facilitate low local costs; and other organizations that encourage cross-sector collaboration. SMEs can also utilize support services provided by other intermediary organizations to achieve cost advantage. Intermediary organizations serve as the glue that holds the ecosystem together, facilitate access to key resources and provide mentors to transition a startup into an ongoing and profitable enterprise.

Business ecosystems

Business ecosystems are loose networks—of suppliers, distributors, outsourcing firms, makers of related products or services, technology and open source platform providers, and other intermediary organizations—that affect, and are affected by, the creation and delivery of a company’s own products and services. In their daily operations enterprises routinely integrate a variety of inputs available from partners within a business ecosystem, collaborate with supply chain partners to distribute products to customers, and leverage complementary services from financial institutions and insurance vendors.
To be competitive, early stage ventures as well as established SMEs need qualified work force; become quality based; and focus on delivering successful product and service innovations. Low local costs and built in ecosystem advantages such as favorable tax treatment in the enterprise free trade jones are important to the viability of a manufacturing startup. Also, SME leaders need to realize that resources provided by networks can alter the nature of Michael Porter’s Five Forces such as the threat of new entrants, bargaining power of buyers and suppliers, threat of substitute products, and rivalry among existing competitors. Before locating their businesses in an ecosystem, enterprise leaders must assess if the ecosystem under consideration contains adequate resources to support enterprise growth.

Networks provide resources

SMEs are constrained by fewer internal resources for product and service innovation as compared to large enterprises. However, they can compensate for this competitive disadvantage by accessing resources from networks operating in the ecosystem. Networks are dynamic in nature and provide resources in six categories such as the information, discussion and advice, capital, borrowable tangible resources, customers-word of mouth referrals, and supplier referrals. Three resources of critical importance to newly formed ventures or small enterprises are entrepreneurial capability, relevant knowledge bases and expertise, and financial capital. The importance of any given resource acquired from the network depends on the competitive strategy of the SME. Focusing on meeting consumer/customer needs and creating compelling customer experiences is a proven SME strategy. Also, SME leaders must learn to draw resources from the network to support a balanced approach of customer driven growth and cost advantage. A balanced approach to achieve accelerated product/service innovation, and competitive advantage in the marketplace will position SMEs for sustainable growth.

Early stage financing

1. Angel/VC financing: Angel/Venture Capitalists (VC) provide capital plus management experience to budding entrepreneurs. Key for an entrepreneur to obtain venture financing from angel or VC investors is to communicate a clear and compelling value proposition. For example, founder of a consumer Internet site can tell angel or VC investors in the seed-round that idea behind the venture is to “turn affinity into money”. But consumers hate display advertisements. The founder then can go on to say that there is a better way to make money than with display ads and say what she will do to implement it. Another example of a compelling value proposition comes from Natera, which developed a gene based prenatal screening test to predict birth defects. Conventional prenatal screening tests are unreliable and invasive. They miss 15 percent of Down syndrome cases during a pregnancy’s first trimester and yield 5 percent false positives. Natera developed a reliable genetic testing method for trace fetal DNA to predict birth defects. It successfully raised $42 million in venture capital.
If the idea behind the venture is really new, the entrepreneur can use a metaphor to communicate its value proposition clearly. For example, when Apple introduced the iPad, it marketed it with a metaphor such as, “a digital magazine reader”. iPad is much more than that.

2. Crowdfunding with intermediaries: If the SME owners or entrepreneurs can’t access seed capital from traditional sources such as the angel investors or VC, they can access crowdfunding from private for profit companies such as the Kickstarter, an US-based private for-profit company. Kickstarter funds creative projects from films, games, and music in art, design, and technology fields. Since its launch in 2009, Kickstarter funded more than 44,000 creative projects in excess of $683 million pledged by 4.4 million people. People can invest in Kickstarter projects in exchange for a tangible reward or one-of-a-kind experience. Examples of rewards for people investing in Kickstarter projects are  “a personal note of thanks, custom T-shirts, dinner with an author, or initial production run of a new product”. A smart watch called “The Pebble Watch” made by Pebble Technology and released in 2013 raised $10,266,844 pledged by 68,928 people. Kickstarter does not allow its site to serve as a platform to place orders for products.

3. Crowdfunding with own site: A SME with a product can roll out its own crowdfunding site using an open source platform such as the Open source crowdfunding platforms allow SMEs to raise funds needed to make an advanced version or limited edition of a product from their customers by showcasing the product on SME’s own crowdfunding site. Lockitron, a company that makes “keyless entry with consumer’s own mobile phone” created its open source platform to raise funds on its own after Kickstarter turned it down because Kickstarter considered Lockitron as a home improvement project and not a creative project. Lockitron named its site Customers preordered 14,704 Lockitron totaling $2,278,891 @ $179. SME leaders interested in setting up own crowdfunding site can start with Selfstarter, customize methods to receive payments, design the site, and deploy it.

4. Equity crowdfunding: Equity crowdfunding allows people to own a piece of the SME they finance and receive dividends and returns on investment. Currently in the US, the Securities and Exchange Commission (SEC) limits equity crowdfunding to accredited investors. Crowdfunding sites such as the AngelList in the US, allow accredited angel investors to make equity or debt investments in startups pending the implementation of JOBS Act, which allows non-accredited US investors to participate in equity crowdfunding also.
Owners of SMEs in need of external capital and with strong roots in local communities can take advantage of crowdfunding platforms to raise funds for continuing local operations or for expansion.
Critics in the Venture Capital (VC) community believe that many crowd-funded ventures will fail to obtain second round funding from traditional sources if they fail to transform their technologies into successful products generating ongoing positive cash flows.

Professional services ventures

Entrepreneurs starting professional services firms do not generally need capital from outside sources such as the angels or VC. Professional services firms with a focus on creating great client experiences can differentiate themselves from competitors in the ecosystem. For example, AnswerLab is a small US enterprise that provides user experience research and consulting services for web, mobile and software applications. It helps clients to understand how their target customers perceive their products. AnswerLab quickly pulls together a group of associates to brainstorm solutions to client problems and makes quick turn around decisions. AnswerLab’s amazingly responsive culture is valuable to clients and differentiates it clearly from much larger market research firms in the ecosystem. AnswerLab tracks its Net Promoter score and strives to keep it at the best-in-class level to stay ahead of competitors in the ecosystem.

Knowledge intermediaries

Intermediaries bring organizations and knowledge together to build supply networks and markets for both product and professional services ventures. Key activities of intermediaries include enhancing alignment of actors in heterogeneous networks, creating a framework for innovation, and implementing NPD best practices, methods and tools. Organizations such as the consulting companies, conference organizers, trade organizations, government agencies etc. play a central role in facilitating and coordinating innovation activities of SMEs in the ecosystem.  Intermediaries also facilitate linkages between relevant actors in the ecosystem by scanning, scoping, filtering, and matchmaking of possible cooperation partners. Knowledge brokers offer an alternative approach to solve tough, science-based R&D problems in the pharmaceutical, biotechnology, consumer goods, and high-technology industries.

1. Access global brain: SMEs can tap into the global brain by hiring knowledge brokers such as the InnoCentive in the US to crowd source solutions for their innovation challenges, or recruit specialists from a global community of researchers, scientists, engineers and technologists. For example, SMEs can post tough science-based problems, together with a designated cash prize (typically ranging from $5,000 to $100,000) for an acceptable solution, on website. SMEs posting problems and prospective solvers remain anonymous to one another throughout the process. Winning problem solvers receive prize money from the SME in exchange for all rights related to the solution.

2. Access crowd power: SMEs can access crowd power utilizing brokers such as the provides access to global labor and talent. SMEs can use this crowd sourcing resource to tap into virtual pools of distributed labor, available on-demand to fulfill simple to complex tasks and achieve cost advantage.

Fill the knowledge gap

Early stage entrepreneurs and established SME leaders are generally unaware of the value of knowledge based services available to them either free of charge or for a fee from intermediaries in the ecosystem. By learning to systematically mine key resources available in the ecosystem SMEs can achieve twin goals of sustainable growth and cost advantage.

Dr. Hams ThotaDr. Hamsa Thota is the president of Innovation Business Development, Inc., an innovation performance training and consulting company in the USA. He was past president and chairman of the Product Development and Management Association (PDMA) and most recently served as the secretary of PDMA Research Foundation (2006-2012). He is advisor to the “Art of Science Learning” project (2012-2016), a US National Science Foundation (NSF) funded project to spark creativity in Science, Technology, Engineering and Mathematics (STEM) education and the development of an innovative 21st century STEM workforce. He was a visiting professor at the Management School of the Zhejiang Univeristy and an honorary professor at the Geely Automotive Engineering Institute in China.

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