Ecosystems epitomize interdependencies. Just as multiple species and diverse life forms thrive in an interlocked ecology, firms too flourish because of robust interdependencies across various business entities. Indeed, for long our fundamental tents of competitive strategy have hinged on managing the forces of these interdependencies, such as with a firm’s buyers, suppliers or rivals within any specific industry. Yet with the onset of digitization, business interdependencies are changing in some fundamental ways, ushering in fresh opportunities to create new value.

The contrast between industrial and digital age interdependencies can be best seen in the distinction between production and consumption ecosystems. Production ecosystems consist of interdependencies enmeshed in a value chain, such as producing and selling a product or delivering a service for the customer. Conversely, consumption ecosystems consist of interdependencies that evolve after a product is sold or a service is offered, and as it is being used or consumed.

For a conventional industrial age light bulb for instance, production ecosystems entail interdependencies such as those across various suppliers, manufacturing and assembly plants, R&D, distributors and retailers. Its consumption ecosystems on the other hand entail interdependencies that come into play after the bulb is sold, and are required to consume or use the bulb; such as, the availability of sockets, wiring and electricity. Most industrial age firms were designed to focus primarily on their production ecosystems, as consumption ecosystems were rarely relevant to their business models. Established bulb manufacturers such as GE and Philips for example, have long been proficient at coordinating hundreds of suppliers, scores of integrated or outsourced plants, and various distributors and mass retailers such as Sears, Walmart or Home Depot. Engaging in the domains of sockets, wiring, or the availability of electricity understandably never made much business sense for them.

In the digital age however, both production and consumption ecosystems have evolved as networks that generate and share data because of IoT connectivity. The fundamental nature of interdependencies in production ecosystems remain the same; yet connectivity has increased its value generating potential. However, modern digital connectivity has significantly transformed the power of consumption ecosystems.

A conventional bulb equipped with sensors and IOT connectivity with a variety of other objects, encounters a host of new interdependencies as it connects to an expanding set of objects such as Amazon’s Echo, Google’s Nest, smart phones, smart doorbells, and smart blinds, while being used or consumed. Such new interdependencies not only expand the bulb’s consumption ecosystems beyond sockets, wiring and electricity, but generate significant new value to both consumers and producers that goes far beyond its conventional role in lighting. In homes for instance, it can be part of security systems helping capture motion sensing or aiding live camera feeds. In warehouses, it can analyze the movement of inventory, improving storage and logistical efficiency. On city streets, it can sense gun shots, alerting police and switching on camera feeds for evidence in subsequent crime investigations. Such new domains for value opportunities arise from the smart bulb’s expanding consumption ecosystem, as more and more objects, assets, systems and people get digitally connected.

Consumption ecosystems arise fundamentally because of complementarities or the necessity to use products or services in tandem. Toothbrushes and toothpaste, gas stations and automobiles, DVDs and DVD players, or paper and printers are some long-standing examples. Each of these products have little use on their own, and necessarily require the complementary accompaniment. Consumers may buy such products separately, but combine them during use or consumption. Manufacturers have historically provided different kinds of options for consumers to make those combinations. Some offer open standards (such as light bulbs and sockets), others proprietary standards (such as razors and cartridges). Some manufacturers co-own or co-brand the complements (such as toothbrushes and toothpaste), others do not (such as bulbs and sockets). Given the cumbersomeness and tangible limitations of combining physical objects beyond a manageable number, the scope of such complementarities in the past was understandably small.

But with the rise of software, the scope and significance of such complementarities have significantly expanded because of the ease with which consumers could connect different software products during consumption. For instance, the software driving the operating system of a smart phone enables consumers to easily add all kinds of software driven apps during its use. Thousands of third party developers can also complement a smart phone’s operating system software. Technologies such as APIs (Application Program Interfaces) have further exponentially expanded the scope of different software programs connecting and interacting with one another. It is such wide scale possibility of connecting a growing range of complementary products, and the options for countless third party entities to participate in providing such complements, that have given rise to what we describe as consumption ecosystems.

Consumption ecosystems personify what is transformational about business interdependencies in the digital age. Consider the following three avenues for new value from consumption ecosystems:

Push new frontiers for growth: With sensors, IOT, software and APIs becoming an integral part of a growing number of products and services, it is now possible to connect them to an expanding set of complements. In doing so, it is also possible to leverage the creativity of thousands of independent developers and value providers. The software operating system Sync in Ford’s new connected cars for instance is open to an estimated eighteen million developers, that can unlock a formidable consumption ecosystem for auto manufacturers, and enable new revenue generating services by connecting various complements to the car. For example, Ford’s Mypass app can connect cars to gas stations for speedier service and payment transactions. It may soon be possible to connect cars with open parking spots equipped with sensors, enabling new services that help drivers efficiently find parking. With strategic API policies, original and innovative ideas for new complements can come from unanticipated sources, each one of them potentially opening new revenue streams and pushing growth frontiers.

Push new frontiers for customization: Traditional approaches for customization relied on R&D, product design and marketing. A light bulb manufacturer for example could offer a set of shapes, colors or wattage options, by configuring its supply chain in specific ways. Understandably these options are finite, constrained by the rigidities within value chains and the need to preserve efficiencies in scale. Customization through configuring consumption ecosystems however can be less constrained because of the flexibility digital connectivity offers to add various complements as options even after the product is sold. A smart light bulb for instance could be customized to track inventory within smart warehouses, to manage security within smart homes, or any other creative use, depending on which complementary objects it connects to, or which consumption ecosystem it chooses to harness.

Insulate from digital disruption: It is likely for digitization to shift value from production to consumption ecosystems, disrupting traditional players by commoditizing their contributions. Light bulbs for instance may generate more value in how they are connected to any specific consumption ecosystem as opposed its production and sales. Nowhere is this more apparent than in the automobile industry with the foreseeable onset of driverless cars. New business models may soon persuade users to shift from owning to ordering cars on demand, luring them onto platforms with a variety of personalized and digitally connected services for their rides. For example, a user could have a driverless car that predicts and arrives when it is needed; is aware of the user’s itinerary for the ride; is able to offer stops at favorite coffee shops or stores, and for the duration of the ride is streaming in personalized news, videos or music. Value add thus may shift from managing established interdependencies within traditional value chains designed to produce and sell goods, to new services related to their consumption, orchestrated through thousands of new interdependencies between digital platforms, app developers, and digital service providers. In such a scenario, Google, Apple, and Uber could commoditize traditional auto manufacturers relegating them to mere components in transportation-as-service platforms. Traditional manufacturers need to insulate themselves from such disruptive forces by making forays into their own consumption ecosystems.

Firms have always operated within ecosystems. Digitization however has ushered in a new facet to our interdependent business world in the form of consumption ecosystems.