WHY DO MOST BUSINESS

ECOSYSTEMS FAIL?
By Ulrich Pidun, Martin Reeves, and Maximilian Schüssler

This article is the third in a series of publica- Such collaborative networks are also play-
tions offering practical guidance on business ing an increasing role in addressing the
ecosystems. The first article addressed the world’s biggest challenges. This was im-
question, “Do you need a business ecosystem?” pressively demonstrated during the early
The second considered how to “design” a busi- days of the COVID-19 crisis, when scores of
ness ecosystem. new ecosystems emerged to coordinate
health care services and balance utiliza-

W e are in the midst of a paradigm

shift in the way businesses are
organized. The traditional model of the
tion, to offer 3D printing capacity to pro-
duce medical equipment, to develop smart-
phone applications for virus tracking and
integrated firm with its hierarchical supply protection, and more.
chain is increasingly being replaced by
business ecosystems, dynamic groups of There are good reasons for the success of
largely independent partners that work the ecosystem model: in an ecosystem’s
together to deliver integrated products and startup phase, this model can quickly pro-
services. vide access to capabilities that may be too
expensive or time-consuming to build with-
Most of today’s business ecosystems are in a firm. Once launched, ecosystems can
built around digital platforms. Our smart- scale much faster than an individual busi-
phones, smart cars, and smart homes are ness because their modular structure
powered by ecosystems of hardware suppli- makes it easy to add partners. Moreover,
ers and application developers; we increas- ecosystems are flexible and resilient; their
ingly order our food, transportation, and modularity enables both high variety and a
accommodation on digital marketplaces; high capacity to evolve. Given all these ad-
and industrial companies are revolutioniz- vantages, it is no surprise that startups and
ing the way they collaborate by moving to established companies are rushing to build
IoT platforms. their own platforms and ecosystems.
However, there is a hidden and inconve- Why Are Successful Ecosystems
nient truth: most business ecosystems fail. So Rare?
Research by the BCG Henderson Institute Ecosystems and digital platforms challenge
found that fewer than 15% were sustain- traditional ways of thinking about strategy.
able in the long run. If we want to harness Boundaries between industries are dissolv-
the power of the ecosystem model, we ing as ecosystems span sectors and incum-
need to understand not only the reasons bents are attacked by tech players and plat-
for success but also the reasons for forms that they had never considered
failure. competitors before. Boundaries between
companies are dissolving, too, as the value
The stakes are high. According to data from the ecosystem creates must be shared
Preqin, in recent years $100 billion has among multiple partners and physical as-
been invested annually in venture capital sets are increasingly separated from value
funds. Based on an analysis of individual fi- capture.
nancing rounds above $250 million, we es-
timate that 60% of these investments went Being successful in such a world requires a
into digital platforms and ecosystem busi- new mindset. Organizations need to move
ness models. If we assume a failure rate of from controlling internal resources to or-
85% for these ecosystem investments, more chestrating external resources, from erect-
than $50 billion of capital is lost every year. ing competitive barriers to engaging vi-
And this does not include the failed invest- brant communities, and from hierarchical
ments of incumbents that try to emulate control to collaboration and persuasion.
the ecosystem model.
Conventional management education does
To understand how to improve the odds of not prepare us well for success in ecosys-
success, we studied more than 100 failed tems, and experience with traditional busi-
ecosystems in a variety of industries and ness models may be outright misleading.
compared them with their more successful Designing a successful business ecosystem
industry peers, using a systematic quantita- poses multiple challenges. For example, it
tive and qualitative analysis. We identified is not enough to design the value creation
an ecosystem as a failure if it was dissolved, and delivery model; the design must also
shrank to an insignificant market share, or explicitly consider value distribution
was acquired for an amount substantially among ecosystem members, and this re-
below its initial funding. Our database con- quires a systems perspective. At the same
tains B2C, C2C, and B2B ecosystems and time, ecosystems cannot be entirely
includes social networks, marketplaces, planned and designed; they also emerge
and software solutions as well as payment, and continuously evolve. This adaptability
mobility, entertainment, and health care is one of their major strengths. So ecosys-
services. On average, the ecosystems we tem design must ensure that the basics are
studied had existed for 6.8 years and had in place and strategic blunders are avoided,
raised funding of $185 million. but it must also leave room for creativity,
serendipitous discoveries, and emerging
Here we summarize the findings and con- customer needs. Ecosystems that are suc-
clusions from our analysis, answering the cessful in the long run need to be ready to
following questions: modify their design in anticipation of shifts
in markets, technologies, regulations, and
•• Why are successful ecosystems so rare? public sentiment.

•• How do ecosystems fail? Managing a business ecosystem also pres-

ents distinct strategic challenges: solving
•• When do ecosystems fail? the chicken-or-egg problem of building sup-
ply or demand during launch; preventing
•• What can you do about it? the explosion of costs during scale-up,
which can be very fast when network ef-

Boston Consulting Group | BCG Henderson Institute 2

 fects kick in; protecting quality during fast or domains where they do not apply. And
growth; and defending against competitors the abundance of cheap venture capital
that use the low entry barriers of many has perhaps supported some questionable
digital platform models to copy and im- investments in zombie businesses that
prove your model and encourage your have no inherent right to survive.
complementors or users to multihome or
even fully switch their allegiance. Given all these factors, it is no surprise that
most ecosystems fail, destroying much val-
The stakes are high because the failure of ue along the way. To address these chal-
ecosystem-based business models tends to lenges, we need to learn from failure, bet-
be particularly costly. Many ecosystems are ter understand its root causes, and identify
driven by strong direct or indirect network the traps.
effects and have winner-takes-all character-
istics. They may require substantial upfront
investments to build the platform and How Do Ecosystems Fail?
attract a critical mass of suppliers and cus- Of course, business failure is always the
tomers, but once they take off, they can consequence of a multitude of external cir-
scale very fast and at low marginal cost. cumstances and internal decisions. When
Focusing on scale before focusing on profit- we analyzed in detail the failed ecosystems
ability, then, can be justified, but this in our database, we could identify patterns
means that failure becomes apparent only that allowed us to assign a primary root
after a significant delay. According to Pitch- cause to each failure. In this way, we uncov-
Book, out of the more than 100 companies ered seven fundamental failure modes.
worth more than $1 billion that have gone (See Exhibit 1.)
public since 2010, 64% were unprofitable at
the time of listing, including ecosystems Remarkably, six of the seven failure
such as Uber, Lyft, Snapchat, and Spotify. modes—and 85% of observed failures—re-
lated to weaknesses in ecosystem design,
These challenges are exacerbated by the while only 15% were attributable to bad ex-
current hype around ecosystems. Herd be- ecution. Occasionally, the design failures
havior fosters shallow imitation and the were strategic blunders in the initial design
transfer of successful models to locations of the business ecosystem. But more fre-

Exhibit 1 | The Failure Modes of Business Ecosystems

RELATIVE SHARE OF PRIMARY FAILURE MODES OF THE INVESTIGATED BUSINESS ECOSYSTEMS

Insufficient problem to solve 10%

Wrong ecosystem configuration 18%

Wrong governance choices 34%

Inadequate monetization 5%

Weak launch strategy 8%

Weak defensibility 10%

Bad execution 15%

Design failures

Source: BCG Henderson Institute.

Note: N=110 ecosystems.

Boston Consulting Group | BCG Henderson Institute 3

quently, they were due to insufficient adap- Failure Mode 2: Wrong Ecosystem
tation of ecosystem design as technological Configuration
or market conditions changed. Assuming that an ecosystem has found a
substantial problem to solve, the next chal-
The failure mode strongly depends on the lenge is to configure the ecosystem to deliv-
context of the given business ecosystem, er the targeted value proposition. This in-
such as its industry, ecosystem type, or volves defining the required activities and
stage in the life cycle. To elucidate these partners, their responsibilities, and the
factors, we will discuss the seven failure links among them, and assigning roles to
modes in turn. various partners—in particular, the role of
orchestrator, which coordinates members,
Failure Mode 1: Insufficient defines standards and rules, and arbitrates
Problem to Solve conflict. The initial configuration should
Among the ecosystems in our database, focus on the core value proposition and in-
10% failed because they did not address a corporate the minimum number of partner
problem that was substantial enough to types required for its delivery.
justify the high upfront investment and to
convince partners and customers to join Among the ecosystems in our database,
the ecosystem. An ecosystem’s value propo- 18% stumbled at this stage. Most were solu-
sition is a function of the size of the mar- tion ecosystems that involved multiple sup-
ket friction it addresses, the share of the pliers and complementors that needed to
friction that can be eliminated by the eco- work together to develop and provide com-
system solution, and the willingness of cus- plex products or services. They failed main-
tomers to pay for it. ly because they could not align all required
innovations or because they could not con-
Many ecosystems that were shipwrecked by vince all required contributors to join the
this failure mode were B2B platforms that ecosystem.
failed in the early 2000s. Encouraged by
the success of B2C marketplaces like eBay An example is the Sony e-reader, which
and Amazon, many companies tried to came to market earlier than Amazon’s Kin-
transfer this model to the B2B space, build- dle but never managed to establish a suc-
ing marketplaces for automotive parts, pa- cessful ecosystem. Sony built a complex
per, chemicals, and other supplies. Howev- blueprint that required customers to pur-
er, most failed because they did not realize chase e-books online and manually upload
that the underlying problem of high trans- them to the e-reader. Because of the open
action costs in B2C was not as pronounced upload mechanism, publishers worried
in B2B transactions. Most industrial buyers about copyright infringement and hesitat-
knew their more limited range of potential ed to join the ecosystem. By contrast, Kin-
suppliers very well and had optimized dle established an integrated ecosystem
their relationships with them. The new configuration that allowed users to auto-
B2B marketplaces did not add much value matically load content from Amazon and
to the transaction, but only shifted value precluded the transfer of books to any oth-
from suppliers to buyers because of in- er device or to a printer. Sony left the
creased transparency and competition, re- e-reader market in 2014, while Amazon be-
ducing the incentive of suppliers to join the came the market leader.
platforms and leading to their demise.
Failure Mode 3: Wrong Governance
We currently observe a resurgence of B2B Choices
marketplace models, such as XOM Materi- The most prevalent failure mode in our da-
als, CheMondis, and Convictional, that fo- tabase—responsible for more than a third
cus on more-substantial problems in B2B of the ecosystem failures we studied—was
transactions: supply chain coordination, wrong governance choices. The governance
data analytics, and other advanced value- model is a critical design choice for an eco-
added services. system because it replaces the hierarchical

Boston Consulting Group | BCG Henderson Institute 4

forms of control in traditional vertical sup- gle made several attempts to establish a so-
ply chains with indirect forms of control cial network, as a latecomer to this market.
appropriate to the complexity and dyna- Google+ used an asymmetric following
mism of an ecosystem. Governance estab- model similar to Twitter’s, in which one
lishes the standards, rules, and processes party can unilaterally establish a relation-
that define an ecosystem’s formal or infor- ship to another. Initially, this led to strong
mal constitution. Specifically, it needs to growth, but user interactions were not con-
regulate access (Who can become a mem- sidered very valuable, and users left the
ber of the ecosystem and under what con- platform. Similarly, Orkut was designed
ditions?), participation (How are decision very openly, with features that let you know
rights distributed among ecosystem part- when other people visited your profile.
ners?), and commitment (What level of Users did not appreciate this lack of priva-
ecosystem-specific investments and cospe- cy, and the network went offline in 2014.
cialization is required?).
Failure Mode 4: Inadequate
According to our analysis, the biggest chal- Monetization
lenge in ecosystem governance is finding Ecosystem monetization strategy defines
the right level of openness. More-open eco- what to charge and whom to charge. The
systems can benefit from faster growth, orchestrator must balance the three com-
particularly around launch. They enable a peting objectives of increasing the overall
greater diversity of participants and variety size of the pie, enabling all important
of offerings and encourage decentralized groups of ecosystem partners to earn a de-
innovation. However, they are difficult to cent profit to ensure their ongoing contri-
control. In the case of high failure cost, and bution, and capturing its own fair share of
a corresponding need to limit the down- the value. Effective monetization encourag-
side, more-closed ecosystem governance es and incentivizes participation by, for ex-
may be the better choice because it allows ample, subsidizing the side of the market
for a more deliberate design of the ecosys- that is less willing to participate, charging
tem and for closer control of partners and for transactions rather than access, or offer-
of the quality of the offering. ing rebates for increased usage.

We found that social networks were partic- Although inadequate monetization strate-
ularly prone to missing the right level of gies were the primary reason for failure in
openness. Most of them failed because only 5% of the investigated cases, this fail-
they opted for a high degree of openness in ure mode was particularly prevalent
an attempt to quickly increase the number among B2C marketplaces. For example,
of users. They tended to underestimate the eBay closed its operations in China in 2006
wisdom of a more closed approach, which after realizing that charging for transac-
can increase the quality of interactions and tions, a model that served the company
the perceived value of the network. Face- well in the US and Europe, was not accept-
book got this right by starting with a very ed by Chinese consumers, who could bene-
strict governance model that allowed users fit from cost-free transactions on the com-
to view only people who went to the same peting Taobao platform, which was
school. Only after the network had estab- financed by advertisements. Similarly,
lished itself as a valuable ecosystem did it Table8, a platform for last-minute reserva-
gradually increase its openness. tions in sold-out restaurants, failed because
it charged customers, while competitors
We also found an especially high rate of like OpenTable, Quandoo, and Bookatable
governance failure among ecosystems that succeeded by charging only restaurants for
tried to emulate successful models or trans- their reservation service.
fer them to other domains or locations.
Competitive pressure frequently forced Failure Mode 5: Weak Launch
these copycat ecosystems to differentiate Strategy
from existing solutions. For example, Goo- A strategic challenge for many business

Boston Consulting Group | BCG Henderson Institute 5

ecosystems during launch is to solve the of the market, resulting in substantial loss-
chicken-or-egg problem of securing enough es. Uber was not embedded enough in the
participation from both buyers and suppli- Chinese mobile app landscape to achieve
ers. The goal is to achieve a critical mass critical mass and finally sold its Chinese
for network and data flywheel effects to business to its competitor Didi.
kick in, whereby scale begets further scale.
Success factors include focusing first on the Failure Mode 6: Weak Defensibility
core value proposition and building a mini- Ecosystems that solve the chicken-or-egg
mum viable ecosystem around it that can problem frequently enjoy winner-takes-all
be expanded over time; emphasizing build- effects. Once they have achieved a domi-
ing a dense network rather than a large nant market position, strong barriers to en-
network in order to improve the quality of try can result from network effects and
interactions; and focusing investments on scale advantages on costs and data. Howev-
the side of the market that is more difficult er, we still identified 10% of ecosystems in
to convince to join the ecosystem (most our database that went down because they
ecosystems we observed were initially did not build effective defenses into their
supply-constrained). design.

More than two thirds of the failed ecosys- The failed ecosystems suffered from one or
tems we investigated struggled with solving several of the following five basic mecha-
the chicken-or-egg problem. However, as nisms of attack: multihoming (suppliers or
previously discussed, there can be many customers participate in multiple compet-
reasons for this, such as the wrong configu- ing ecosystems at the same time or easily
ration or governance or monetization mod- switch between ecosystems), disintermedia-
el. In 8% of the cases, a weak launch strate- tion (partners from two sides of a transac-
gy was the primary reason for failure. This tion ecosystem bypass the matching plat-
failure mode is particularly prevalent form and connect directly), differentiation
among solution ecosystems that require (a subset of users has distinctive needs or
large investments from members, and tastes that can support a separate ecosys-
among transaction ecosystems with only tem that takes away market share from the
limited barriers to entry or high numbers dominant player), ecosystem carryover (a
of existing competitors. successful business ecosystem expands into
a neighboring domain), and backlash (from
An example of a failed solution ecosystem incumbents, consumers, suppliers, or regu-
is the HD-DVD platform (an ecosystem led lators that challenge the business model
by Toshiba, Microsoft, and others), which or practices of the ecosystem). Successful
lost the standards war of high-definition ecosystems respond to these threats by
DVD players to the Blu-ray platform designing user lock-in into their models,
(backed by Sony, Apple, and others). Nei- incentivizing customer and supplier loyalty,
ther standard was technically superior to increasing switching costs, and designing
the other, and the HD-DVD ecosystem won their ecosystems not only for legal compli-
the battle to sell more DVD players to con- ance but also for long-term social
sumers. However, Blu-ray ultimately pre- acceptance.
vailed because it secured the exclusive sup-
port of large film studios such as Warner We found weak defensibility as a primary
Brothers and Fox Searchlight Pictures. failure mode to be particularly prevalent
within highly regulated industries and
Uber China is an example of a transaction among ecosystems with a high incentive to
ecosystem that failed because it could not multihome. For example, from 1974 to
solve the chicken-or-egg problem in the 2006, Bankcard was the leading credit card
highly contested Chinese ride-hailing mar- ecosystem in Australia and New Zealand,
ket. The company managed to lure drivers managed by a joint venture of Australia’s
and riders to its platform, but only at the leading banks. However, once MasterCard
cost of permanently subsidizing both sides and Visa entered the Australian market,

Boston Consulting Group | BCG Henderson Institute 6

Bankcard was not able to defend its lead- The typical life cycle of an ecosystem can
ing position because of its purely local be divided into four phases with specific
footprint. Similarly, StudiVZ was the lead- jobs to be done and corresponding success
ing social network in German-speaking factors:
countries, with more than 15 million mem-
bers in 2009, but did not manage to defend •• The launch phase, with a focus on
its position when Facebook entered the Eu- developing a strong value proposition
ropean market with a superior value prop- for all participants and on finding the
osition and a global footprint. right initial ecosystem design.

Failure Mode 7: Bad Execution •• The scale phase, with a focus on increas-
We were surprised to find that only 15% of ing the number and intensity of
ecosystems failed because of execution is- interactions in order to grow toward a
sues. In some cases, the problems were op- dominant market position.
erational, as in the case of Canvas Net-
works, a social network that allowed users •• The maturity phase, with a focus on
to share and play with images and closed increasing the loyalty of customers and
when members of the community lost ac- suppliers, and on erecting barriers to
cess to their artwork after a hacker attack. entry for competitors.
In other instances, failure could be attribut-
ed to management action, as in the case of •• The evolution phase, with a focus on
Wikimart, a heavily funded marketplace expanding the offering and on continu-
that aspired to become the Russian version ous innovation to thrive and survive in
of eBay but went down after a series of the long term.
questionable acquisitions of unprofitable
retailers. Sometimes outright fraud contrib- Our analyses confirm the assumption that
uted to demise, as in the case of Auction- ecosystems tend to fail late: seven out of
ata, a popular online auction platform that ten failed ecosystems in our database made
was among the first to develop the concept it into the scale phase before flaws in their
of livestream auctions but had to shut design materialized and led to their de-
down after allegations that the company mise. (See Exhibit 2.) And even those 30%
supported shill bidding on selected items. of ecosystems that failed during launch
achieved a median survival time of 3.5
A final source of bad execution that we un- years while burning $16 million of inves-
covered was complacency. An example is tors’ money. Most of them failed because
Microsoft’s Internet Explorer, widely con- they could not address a large enough
sidered to have won the browser war after problem or establish an effective configura-
capturing close to 95% market share in tion (failure modes 1 and 2).
2004. With no serious competitor left, Mic-
rosoft underinvested in further develop- Of the ecosystems in our study, 45% failed
ment of the browser and its underlying during the scale phase, most of them be-
ecosystem, which allowed Firefox and cause they could not solve the chicken-
Chrome to enter and eventually dominate or-egg problem of bringing a critical mass
the market. of all required sides of the market to
their platform. Detailed analyses revealed
When Do Ecosystems Fail? that this was mainly due to the wrong
The nature of many ecosystems—with level of openness in their governance or a
their highly attractive winner-takes-all weak launch strategy (failure modes 3
characteristics based on strong network ef- and 5).
fects that justify persistent investments
and loss-making to achieve a dominant po- The maturity phase was the point of down-
sition—implies that failure may become fall for 20% of the ecosystems in our data-
apparent only late in the ecosystem’s life base. At the point of failure, they had re-
cycle and can thus be very costly. ceived a median amount of $79 million in

Boston Consulting Group | BCG Henderson Institute 7

Exhibit 2 | When Do Business Ecosystems Fail?

Size

Launch Scale Maturity Evolution time

Failure
rate
30% 45% 20% 5%

• Insufficient problem • Wrong governance • Bad execution • Bad execution

Main failure to solve choices • Wrong governance • Weak defensibility
modes • Wrong ecosystem • Weak launch strategy choices
configuration • Weak defensibility

Source: BCG Henderson Institute.

funding and survived for five years. The of our understanding. However, we should
most prevalent root cause of failure was ex- also learn from their failures.
ecution issues (failure mode 7), but design
flaws in governance and defense also ex- If you are a founder, manager, or investor
plain half of the downfalls (failure modes 3 and are considering building or joining a
and 6). business ecosystem, you can learn from
these insights and increase the odds of suc-
Finally, only 5% of ecosystems failed in the cess. Our checklist can help you assess the
evolution phase, after successfully estab- vulnerability of your ecosystem design.
lishing and defending their leading posi- (See Exhibit 3.)
tion for an extended period, with a median
survival time of 25 years. However, they ne- Of course, business ecosystems cannot be
glected to continuously adapt, advance, entirely planned and designed in advance.
and reinvent the ecosystem and failed be- The only way to succeed in the long run is
cause of execution issues or because they to be adaptable and modify the design in
did not adjust their defense mechanisms to anticipation of shifts in markets, technolo-
the changing environment (failure modes 6 gies, regulations, and public sentiment.
and 7). Nevertheless, our list of questions can help
you regularly challenge the viability of
your model. If not all answers are positive,
What Can You Do About It? you may need to adapt the design of your
Business ecosystems, in particular those ecosystem—or accept that it is time to pull
built on digital platforms, are a relatively the plug rather than burn more money.
new phenomenon. Traditional manage-
ment concepts of industry analysis and val-
ue chains are insufficient if we want to
master the ecosystem model. Many found-
ers, managers, and investors had to learn
this the hard way. Their experience should
humble us and make us realize the limits

Boston Consulting Group | BCG Henderson Institute 8

Exhibit 3 | Ecosystem Design Vulnerability Checklist

High risk for …

Does your ecosystem have a clearly defined value proposition?
Insufficient
Do you remove a substantial existing market friction? B2B marketplaces
problem to solve
Do you address a substantial unmet or new customer need?

Do you have a clear blueprint of all required activities, actors, roles, and links?
Wrong ecosystem Solution ecosystems
Can you convince all required partners to join and stay on board?
configuration with multiple partners
Are all technologies that are needed to build the solution available and aligned?

Is your ecosystem open enough to encourage growth and diversity?

Wrong governance Social networks
Is your ecosystem closed enough to ensure quality and control?
choices Copycat ecosystems
Is your governance flexible enough to adapt to shifts in market and technology?

Does your monetization strategy allow all relevant partners to earn a profit?
Inadequate
Does your monetization strategy encourage increasing use of the ecosystem? B2C marketplaces
monetization
Do you subsidize the right side of the market?

Can you achieve the required critical mass of both suppliers and buyers? Ecosystems with strong
Weak launch
Do you focus investments on the side of the market that is less willing to join? competition or high
strategy investment needs
Can you create positive network effects that support self-reinforcing growth?

Do you incentivize customer and supplier loyalty and increase switching costs?
Weak Ecosystems prone to
Do you actively build barriers to entry for new competitors?
defensibility multihoming
Do you encourage legal compliance and long-term social acceptance?

Source: BCG Henderson Institute.

About the Authors

Ulrich Pidun is a partner and director in the Frankfurt office of Boston Consulting Group. He is a core
member of the Corporate Finance & Strategy practice, a global expert on corporate strategy, and a Fellow
at the BCG Henderson Institute. You may contact him by email at [email protected].

Martin Reeves is a managing director and senior partner in BCG’s San Francisco office and the chair-
man of the BCG Henderson Institute. You may follow him on Twitter @martinKReeves and contact him by
email at [email protected].

Maximilian Schüssler was a project leader in BCG’s Munich office and an ambassador at the BCG Hen-
derson Institute.

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About the BCG Henderson Institute

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