Defining a unique market position for mature software firms becomes crucial as they transition from prioritizing growth to emphasizing profitability.

Emerging and fast-growing companies embrace an innovation culture focusing on product and market development. Investing in growth and neglecting profitability is the usual way to plant the seed for long-term value creation in flourishing markets during this stage – when sound financing is provided.

Going forward, firms must take a leading position in their targeted markets, building on initial product market fit. This strategic assignment aims to keep growing at lower-level growth rates, as suggested by startup playbooks, but at a larger scale. At the same time, companies must establish commercial and operational excellence in business practices to foster profitability.

Take a leading position using network effects

Maintaining high growth rates becomes ever more demanding without using some kind of flywheel effect. Recurring revenues from XaaS business models are usually built in during a software firm’s very early stages. Sustainably thriving firms also often utilize the catalyzing effects of business networks to attain and enlarge their leading market position.

NFX, a venture capital fund specializing in network effects, estimates that since the wide availability of the internet in the middle of the 1990s, approximately 70 percent of the value in the technology sector has been created using network effects. Most of these business networks, including those led by the technology giants, are consumer-focused business models.

We expect network effects to increase in importance over the next years as ICT systems become more holistic to support broader vertical fields of applications and more comprehensive economic and social use cases. The forecasted demand for cyber-physical systems (CPS) indicates the importance of these networks.

Complex CPS consisting of multiple components from software, hardware, connectivity, and related services depend on well-functioning business networks with specialized providers, which will create significantly greater value than the sum of the single components.

Such B2B ecosystems are opportunities for maturing firms to establish a leading position in newly emerging market segments. The option for ICT providers to operate in different business ecosystems extends the network leverage and the need for dedicated ecosystem management simultaneously.

For example, suppose software components for specialized use cases are applied for different CPS serving specific vertical industries. In that case, the solution providers must permeate and address the demands of the underlying user industries and manage the diverse ecosystems serving these demands. Business networks clustered in that way allow firms to attain a unique and successful market positioning, building on the advancing ICT market opportunities.

Become excellent in what you do

Whatever model a firm chooses to attain profitable growth calls for a set of mature commercial and operational practices. There are various areas to be considered in that respect. Some specific areas are gaining importance in digital B2B ecosystems. Beyond corporate management, sales and marketing, operations, and financial control are equally in demand. Below are some examples to consider in establishing excellent business practices.

Business ecosystem management

As described above, utilizing network leverage for sustainable growth involves finding the firm’s role and managing its engagement in these networks. This goes beyond traditional partner management.

B2B ecosystems establish a meta-organization where each party takes distinct responsibilities without having the organizational and commercial blueprints usually applied to a single firm’s business activities. Each ecosystem has specific traits and rules based on individual agreements between the partners. 

Developing ecosystems requires sound analysis and methodical frameworks to succeed. Defining the business model and developing ecosystem services is as critical as constructing the value network model. Management and operations will eventually  require attention in different areas. 

Business setup and steering

  1. Design and management practice to promote participation and value creation for all stakeholders.
  2. Accelerated service creation and commercialization for competitive time to market.
  3. Goals and metrics to reflect the ecosystem structure and support value creation.

Technical infrastructure

  1. Tools to facilitate interaction between the partners and between partners and customers.
  2. Infrastructure designed to enable value network transparency and fast scaling.
  3. Data security while opening systems to external partners.

Partner management

  1. Mechanisms to realize network effects and preempt competition.
  2. Partner orchestration to produce optimal output.
  3. Appropriate monetization and compensation of partner and third-party products and services.

Advanced analytics in marketing and customer interaction

How shall the product and services roadmap look like considering all the information available from within a business network, from interacting with customers, from customers using current products and services, and from predictions about how demand will evolve within the range of current offerings?

Making all the information available in a digital format and working on it using advanced marketing analytics techniques and tools draws the full potential from that data. In times when verticalized and individual customer demands to support competitive differentiation gain importance over the simple wish for standardized and cost-efficient systems, advanced marketing analytics becomes more critical to software firms.

Secure and managed software supply chain

With software becoming available almost everywhere within highly decentralized architectures and massively increasing numbers of devices with embedded software, the exposure to security threats is growing tremendously. The vulnerability resulting from the expanding number of access points and the process of developing software and making it available is subject to cyber threats.

Securing software supply chains is critical in a digital world. The software supply chain includes the sources of software, infrastructure including the cloud, hardware, operating systems, and everything involved in the production and provision of software end-to-end.

Today, software is usually not all created from scratch but combined with available software artifacts. This implies losing control over source code, which may cause security issues. Besides vulnerability, there are further risks for software supply chains to be considered. Policies and process guidelines are compulsory to mitigate software supply chain risks. DevOps practice conceptionally addresses security from the start.

Project and operations control the journey to servitization

Moving from pure products to services or a mix of offerings involves utilizing differing development, production, and service delivery approaches. This implies appropriate management skills in related functions as well as control procedures to be applied not only at the management level.

For instance, product business requires development effort, which is investment before any expected revenue. Project business, in contrast, assumes effort for services expensed as incurred and recognized as revenues depending on contract type, either according to expenses or based on delivery milestones. Each case implies different profitability schemes and requires other control practices.

Shared capacities in service-focused firms enable economies of scope; at the same time, underlying resources must be appropriately reflected in margins for service offerings or overhead to support adequate service portfolio decisions. For product-focused businesses, resource and cost allocation are underlying deviating provisions. We frequently see firms struggling to reflect the different types of business within one operating unit under one P&L.

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