Customer solutions generally can not be supplied by an individual vendor — no matter how large — because of the diversity of innovation taking place and the diversity of customer needs. In the past few years, many business schools have embraced the concepts of “networked economies” or “business ecosystems.” [1] As noted by Carl Shapiro and Hal Varian, “There is a central difference between the old and new economies: the old industrial economy was driven by economies of scale; the new information economy is driven by the economics of networks…”[2]
The concept of “business ecosystems” offers rich metaphors drawn from ecological science for helping companies to understand their roles and the importance of partnering. A Harvard Business School seminar helps explain some of these concepts: [3]
“As with biological ecosystems, business ecosystems are formed by large, loosely connected networks of entities. As with species in biological ecosystems, firms interact with each other in complex ways, and the health and performance of each firm is dependent on the health and performance of the whole. Firms and species are therefore simultaneously influenced by their internal complex capabilities and by the complex interactions with the rest of the ecosystem . . . .rather than establishing a static and clear boundary between ecosystems, as we often do for the boundary between industries, it is better to gauge the degree of interaction between different firms and depict ecosystems as communities of firms characterized by a given level and type of interaction (e.g., market relationships, technology sharing and licensing agreements, etc.).”
As with other thinkers in this area, the HBS scholars recognize three types of firms:
- Dominators, which gobble up other firms and attempt to occupy all competitive niches. Systems with dominators tend to be fragile and overtaken by systems characterized by the following two types of firms,
- Keystones, which provide enabling platforms or other capabilities that help leverage others to partner or innovate, and
- Niche players, the bulk of the firms, that themselves can also provide enabling keystone capabilities.
In business ecosystems, most firms should follow niche strategies. The HBS scholars go on to note:
“A direct implication of our framework is that the performance of a firm is a function not only of its own capabilities, or of its static position with respect to its competitors, customer, partners, and suppliers, but of its dynamic interactions with the ecosystem as a whole. Our approach therefore directly tackles the collective impact of network interactions of ecosystem participants on the operating performance of the firm.
“. . . ¦technological innovation literature often focuses on the firm’s reaction to novelty as an exogenous threat that leads to catastrophic change. In this way, it fails to capture the ways in which firms can influence the changes, offer solutions to multiple ecosystem participants, or buffer themselves through connections with their business partners and competitors. It emphasizes internal capabilities, rather than the integration of these capabilities with external network relationships.”
“The fundamental advantage of a niche player is focus. Niche players focus by leveraging the services provided by the keystones in their ecosystem, and by concentrating on the acquisition of business and technical capabilities that directly support their niche strategy.”
Marco Iansiti, expanding on these themes in a later paper, Managing the Ecosystem,[4] provides three factors for measuring the effectiveness of a business ecosystem:
- Robustness is the ability to survive disruptions and unforeseen changes. A robust ecosystem provides its members with a buffer against external shocks and provides a degree of predictability. A crude measure of robustness is the survival rate of ecosystem members, such as customers, suppliers, and distributors. One of the challenges a company faces is its dependence on fragile areas of its ecosystem. In 2001, Cisco, for example, was saddled with more than $1.5 billion in surplus inventory when one of its customer domains went out of business.
- Productivity is the ability to consistently transform technology and other raw materials, such as labor or process, into lowered costs, new products, and functions. This can easily be measured by return on invested capital. Over the past decade, software companies, for example, averaged a return of more than 10%. Productive partners tend to be better partners, which will invest more in innovation.
- Niche creation is the ecosystem’s ability to create new, valuable functions and foster diversity that creates real value. High-technology companies, for example, tend to embrace innovation, which has created ongoing opportunities for the development of new domains in an ecosystem. Business executives can look to applications to provide insight into the innovative potential of different classes of partners, suppliers, and customers.
He goes on to state:
“An ecosystem-based perspective makes clear the importance of interdependency in today’s business environment. Stand-alone strategies no longer work. A company’s performance is increasingly dependent on its ability to influence assets outside its own direct control. If a power position is used to dominate and take over a network, then value is drained from that network. Keystones, in contrast, know how to exercise the power of their position indirectly, and in cooperation with others within their ecosystem to create value for all its members.”
As in biological keystones, business keystone players are not necessarily the largest or most visible organisms. Keystone players often “punch above their weight.” Rather than size or visibility, look to the degree of linkages. Keystone players are the ones at the hub of many interconnections.
Two powerful means for promoting or joining a business ecosystem is through partnering and alliances or embracing technology standards. The open source movement combines elements of both.
Partnering and Alliances
For example, Cisco, among others, has been a leader in establishing what is required for ‘ecosystem’ synergies and partnerships: “Strategic alliances allow companies to offer complete solutions while still maintaining their focus on their core competencies. Today’s leading companies are no longer trying to be everything to everyone. Instead, they increasingly focus on doing one thing (or a few related things) well, rather than spreading their energies over a vast array of offerings.”[5]
Partners and allies protect and sustain one another, provide additional means of business and market intelligence, all leading to more robust environments.
Technology Standards
Another factor that promotes adaptive business ecosystems is technology standards. The trend of business ecosystems and interoperability requires adopting keystone standards and working with business partners with complementary competencies that have also embraced these standards. As Iansiti and Levien go on to conclude:[3]
“To the extent that niche players focus their own activities narrowly on a specific domain, while using existing solutions for everything else, they improve their own productivity and efficiency. This has important implications for product architecture: niche firms need to view their products not as standalone entities designed from the ground up, but as ‘extensions’ of an interconnected network of elements in which conventional product boundaries may not be distinct or clear.”
Open Source: All Ecosystem Aspects
Open source combines the network, alliance and technology standard aspects of robust business ecosystems. In addition, because of its inherent commitment to interoperability, open source software more often than not plays the role of a keystone technology in this ecosystem. This is especially true for LAMP (Linux-Apache-MySQL-Perl/Python/PHP) and related systems.
It is interesting to note that the European Union has adopted the Digital Business Ecosystem (DBE), http://www.digital-ecosystem.org/html/, a 14 million (Euro) 3-year research project supported by 20 partners from 10 EU member countries. It involves harnessing well-known principles of self-organization and self-optimization, taken from various fields of science and nature, and applying them to the interactions between businesses. The effort is being mediated by open architectures and standards.
Adaptive business ecosystems promise to be more stable, last longer, and respond better to external change. These factors suggest an excellent robustness for open source systems, initiatives and players. That is not to say that all open source players will survive; indeed, many will not. But it does mean that an alliance with open source may on average increase an individual company’s likelihood of survival.
Further Reading
The references to this posting are all worth a look. There is a longer treatment by Iansiti and Levien that has many useful references.[6] Also, for a lengthy review of the current literature, see Peltoniemi’s, Business Ecosystem: A Conceptual Model Of An Organisation Population From The Perspectives Of Complexity And Evolution.[7]
[1] S.E. Gothlich, “From Loosely Coupled Systems to Collaborative Business Ecosystems,” paper No. 573, University of Kiel (Germany), May 2003. See http://www.bwl.uni-kiel.de/grad-kolleg/de/kollegiaten/goethlich/Business%20Ecosystems%204b%201,5Z.pdf
[2] C. Shapiro and H. Varian Information Rules. Cambridge, MA: Harvard Business School Press, 1998.
[3] M. Iansiti and R. Levien, “Keystones and Dominators: Framing the Operational Dynamics of Business Ecosystems,” Harvard Business School Seminar, November 2002, 83 pp. See http://www.hbs.edu/units/tom/seminars02-03/Marco_Nov_2002.pdf
[4] M. Iansiti, “Managing the Ecosystem,” Optimize Magazine, February 2005, Vol. 22. See http://www.optimizemag.com/article/showArticle.jhtml?printableArticle=true&articleId=59300381
[5] For more information on Cisco’s view of the Internet ecosystem, see http://business.cisco.com/prod/tree.taf%3Fasset_id=85949&ID=85949&public_view=true&kbns=1.html
[6] M. Iansiti and R. Levien, “Keystones and Dominators: Framing Operating and Technology Strategy in a Business Ecosystem,” Keystone Strategy, Inc., White Paper, February 2004, 83 pp. See http://www.key-inc.com/ecosystems.pdf
[7] M. Peltoniemi, “Business Ecosystem: A Conceptual Model Of An Organisation Population From The Perspectives Of Complexity And Evolution,” January 2005, 93 pp. See http://www.tut.fi/units/tuta/tita/tip/2004_reports/Peltoniemi_business_ecosystem.pdf
