Our innovative strength is the key to securing our business success in the long term. With the digitalization of nearly all our businesses, conditions have changed. We are now in an environment where new platforms, apps and technologies appear daily and are partly already obsolete again at the time of release. The emerging Web3 visibly accelerate this effect.
For this reason, in particular, it is important for a company to be ahead of the curve and new customer needs quickly on the market with creative solutions. So how do you keep pace?
APIs in the News (1)
APIs are becoming the link between business and technology. They enable companies to access their own data and services as well as those of third-party providers and integrate them in the digital value chain. "The API Economy: It's Game Time" was the headline of the Wall Street Journal in 2019 (2). Other renowned publications also picked up on the topic in recent years or reported on successful API startups [...]. This increasing attention from the press alone illustrates the growing importance of the topic for companies." (3)
Why is this so and what impact do APIs have on the innovative power of companies? This is the question we want to address in the following article. It is based on the book "Building Blocks of Digital Transformation - How APIs Pave the Way for Companies into the Programmable Economy", which was published by Springer Verlag in 2022 (unfortunately so far only the German edition has been released). The authors of the book use examples, classifications and case studies with major German corporations (including Lufthansa Cargo, Deutsche Bank, Commerzbank) to try to build a bridge between technology and business via the API.
The core technical features of the API
At their core, APIs - short for Application Programming Interface - are programming interfaces of applications. They enable and control external access to the data, processes, and competencies within the application. Known to developers for decades, APIs have technical properties that give them a central role in the implementation of digital innovation. Especially in the context of Web2 and Web3 applications, 3 core technical properties can be derived for REST APIs:
Modularity
Instead of creating software monoliths that grow larger and more complex with each development cycle, APIs allow applications to be broken down into functional elements or services. This enables entirely new types of software development. "Similar to a Lego model made up of numerous building blocks, an application can be assembled from several known and new software programs (services). Individual services can be quickly and easily replaced. Once programmed, the API can be used by any number of applications."
Interoperability
The basis for the modular design is the common standards of APIs, such as REST. The individual API building blocks can be programmed and designed with the best possible technology necessary for their purpose - and the respective experience of the developer.
Encapsulation
Used correctly, APIs create a controlled way to process requests to access data and functions of an application. It is crucial to implement the right authentication and authorization mechanisms. This ensures that only the data, processes and competencies that have been approved for external use are made available. "This makes APIs the legitimate representation of Lego bricks in the digital world. Used correctly, they help companies build digital castles and palaces that would otherwise remain castles in the air." (4)
Core potentials of the API
From these 3 core technical characteristics, four core potentials of the API for enterprises emerge.
The four core potentials of the API (5)
"With the help of these core potentials, the potential opportunities of the use of APIs by companies can be depicted. The two core potentials "Digital Building Blocks" and "Resilient Applications" relate to API consumers. API providers can leverage the "Direct Access" and "Partnerability." (5) In practice, a company is both: a provider and a consumer of APIs. What does this mean for business innovation now?
From internal innovation to partnering and Open Innovation
If a company offers access to its data, processes, or competencies via APIs, this simultaneously increases its ability to enter into new partnerships with other companies. An example: "The Star Alliance, one of the most successful global alliances, was founded in 1997 as a merger of the competing airlines ("Frenemies" or "Coopetition") United Airlines, Lufthansa, SAS, Thai Airways and Air Canada. The goal of the merger was to leverage synergies wherever the bureaucratic effort was low and the economic advantages were high [...]. The consequences were cheaper prices and better offers for consumers (Kewes 2007) (6). [...] In 2016, the Star Alliance is investing several million dollars in the modernization and harmonization of the IT systems of the various members to take account of global trends [...]. The goal was to develop "plug & play" solutions for the member airlines (see Star Alliance 2016) (7). This idea was implemented with the help of APIs. A developer portal for developers (8) of Star Alliance member companies allows [...] access to internal digital solutions via API." (9)
There are three different levels on which a company can share access to its data, processes, and competencies. A distinction is made here:
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Internal APIs: access is reserved exclusively for use within the company or for internal value creation.
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Partner APIs: they are provided exclusively to a partner or a group of selected partners in the context of alliances or joint ventures.
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Public APIs: they are made available for use by all external developers (whereby the company reserves the right to exclude individual user or user groups from development).
Level of sharing (10)
Eco-systems of users can form around each of these degrees of openness. These influence the innovative strength of the company in different ways.
Internal APIs for intra-enterprise eco-systems through vertically integrated value creation
In internal eco-systems, the APIs are provided exclusively within the company or group. "External players are excluded from using them. The main target group for such an eco-system are software developers and architects within the company. On the one hand, they can consume APIs from the eco-system, and on the other hand, they can provide their own APIs within the company." (10)
At this point - but also in the following - the potential of the API as a digital building block comes to the fore. What does this characteristic mean exactly?
APIs as digital building blocks (11)
"Companies can develop their own digital building blocks or integrate external ones. External digital building blocks are competencies (data and functions) from external companies that can be connected via APIs, e.g. Google's Maps service or the services of a payment service provider [...]. Once developed, internal digital building blocks can be easily reused and allow companies to duplicate their own competencies in any technical way they want. [...] If, for example, an OCR solution has been developed in the company's customer service department to digitize incoming customer communications, this OCR solution can be made available internally to other departments as a digital building block. They [...] thus benefit from the competencies already available within the company without the need to purchase new solutions externally."" (12) The API marketplace within the BCP's tech-sharing area follows this approach. There is even a ready-to-use OCR API solution already available for easy usage.
APIs within innovation processes (13)
By using APIs or digital building blocks during creation, MVPs can adapt the latest technologies at an early stage. "[…] first MVPs can be created more quickly - in the sense of the design thinking process - through rapid prototyping, in order to have them tested by innovation-enthusiastic customers and to obtain feedback for improvement and further development." (13)
The big cloud providers in particular provide a wide range of functionalities (e.g. building blocks for artificial intelligence, blockchains or mixed reality functionalities). But also outside of these, a wide range of APIs for consumption can be found on the internet. Marketplaces like RapidAPI (14) have a solution for nearly every need in one of their digital shelves.
"In sum, the use of APIs leads to shorter development cycles, reduced development costs and increased productivity for software developers. Instead of the initial development of new software, the developer can implement ready-made modules and then test whether the API works as desired. [...] With their potential [...] APIs thus not only have a positive impact on the productivity of software developers, but their use also has a positive impact on the innovative power of a company by accelerating the "time-to-value" of product innovations and thus giving the company decisive competitive advantages in the development of digital products." (15)
Co-creation through APIs within partner eco-systems
If a company also opens access to its APIs to selected partners, the next stage is reached: partner eco-systems are created. "The primary target group here are the software developers of the selected partners. Depending on the design of the eco-system, they can either use only the APIs offered or additionally offer their own APIs to all participating partners (16) ". This degree of openness enables joint developments to be achieved within the framework of co-creation processes. Uber and Spotify provide another clear example of this (https://www.uber.com/newsroom/ridermusic/):
"The integration of the two company apps [...] allowed Uber users to connect their Spotify account to their Uber account. Within the Uber app, customers could select their songs while driving and play them through the app on the driver's phone in the car. This was made possible by using the Spotify API within the Uber app (Lawler and Lunden 2014) (17). [...] Uber called this feature the "Rider Music Experience." For the end user, this connection was conceivably easy to set up [...] and use. The resulting integrated user experience was a complete success: The customer ordered his desired ride via the Uber app. If he listened to music via his Spotify app at the same time, he could seamlessly continue listening to his songs via the stereo system after getting into the car and removing the headphones." (18)
The functionality was removed from the app in 2017 and the partnership ended. Nevertheless, this is an exciting example of how APIs can help create a better UX for users. A classic win-win situation.
Open Innovation: public APIs for open eco-systems
Opening access to APIs to the general public creates an open eco-system. "The main target group of public APIs are third-party developers and software architects unknown to the company. Developers can directly use the public APIs after registering on an appropriate platform and use them in their own applications and processes. These platforms become a kind of department store or digital hardware store for developers." (19)
These open eco-systems allow new forms of innovation processes that are deliberately not in the hands of the providing company. In interaction with easy-to-use and well-documented APIs, open innovation emerges.
"Open innovation" has become a buzzword in modern corporate management in recent years. It describes - in contrast to closed innovation - a collaborative process that involves suppliers, customers, partners, competitors and third parties in the development of innovations. The idea is simple: companies make their digital assets publicly available. In doing so, they tap into the creativity and entrepreneurship of external developers, who subsequently build new products and business models based on the assets and enter new markets. [...] The company itself participates in these new business models and benefits from external research and development processes (Chesbrough 2007) (20). The principle is "thinking outside the box." APIs are well suited for the implementation of open innovation projects. [...] The monetization options of APIs allow third-party revenues to flow back to the providing company. Figure below […] shows in a simplified way the different approaches between closed and open innovation processes in companies. While outside-in innovation happens via external but publicly available APIs […], public APIs enable the company to innovate inside-out." (21)
Closed vs. Open Innovation (21)
"External developers strengthen the innovative power of the company. Both sides benefit from this in the long term: The API provider and the developer of the software. […] Mercedes-Benz, for example, offers an API that enables the filling status of the vehicle tank to be queried in real time (see Mercedes Developer 2021 (22)). The data from the car's corresponding sensor is made available for this purpose. In the future, a third-party developer could use this API, for example, to develop an app - in combination with other APIs - that automatically navigates the driver to the next filling station when the fuel level falls below a certain level. In this case, the third-party developer would sell the app to the driver. The revenue from the sale of the app would in part benefit Mercedes-Benz, as the company charges a fee for the use of the API. In addition to this revenue, the Mercedes brand benefits from the increased appeal brought about by the additional digital offerings. A win-win situation couldn't look any clearer." (23)
Conclusion
Through their core technical properties and the derived core potentials, the consistent use of APIs strengthens the innovative power of companies. As digital building blocks, they enable developers to quickly access a huge pool - or construction kit - of prefabricated components when developing new applications. Furthermore, they enable new types of innovation processes: from fast partnerships in the digital space to open innovation processes, which in part complement or can substitute the company's own R&D processes.
From value chains to value networks (24)
"This is how internal value chains become external value networks, in the context of which digital eco-systems form. The API is the entry ticket for companies into these digital eco-systems." (25)
With the API marketplace in the tech-sharing area of BCP, we have a strong infrastructure in place within Bertelsmann to strengthen our own innovative power through the cross-divisional use of APIs and to jointly inspire our customers with new digital products!
References
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https://www.barrons.com/articles/visa-is-buying-plaid-for-5-3-billion-to-help-it-compete-with-venmo-51578954755, https://www.forbes.com/sites/tomtaulli/2020/01/18/api-economy--is-it-the-next-big-thing/?sh=62b076c342ff, https://techcrunch.com/2015/05/06/apis-fuel-the-software-thats-eating-the-world/
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Mason R (2019) The wall street journal – the API economy: it's game time. https://deloitte.wsj. com/cio/2019/01/09/the-api-economy-its-game-time/. Zugegriffen: March 23, 2021
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Star Alliance (2016) Star Alliance determines next steps in service enhancement. erschienen in: staralliance.com. https://www.staralliance.com/en/news-article?newsArticleId=790438&grou pId=20184. Zugegriffen: May 7, 2021
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Lawler R, Lunden I (2014) TechCrunch. https://techcrunch.com/2014/11/14/uber-music/?_ ga=2.10707388.980532360.1601492440-1483490727.1595420647. Zugegriffen: October 1, 2020
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Chesbrough H (2007) Open innovation: the new imperative for creating and profting from technology, 5. Auf. Harvard Business School Press, Boston
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Mercedes Developer (2021) Fuel status. erschienen in: developer.mercedes.com. https://developer. mercedes-benz.com/products/fuel_status. Zugegriffen: May 7, 2021
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