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Technology strategy and management
Business Ecosystems: How Do They Matter for Innovation?
Credit: Flexey and Toria
More and more people are living and working in business ecosystems. We read and talk about the entrepreneurial ecosystem, the e-commerce ecosystem, and the mobility ecosystem. But we do not know enough about the key characteristics of an ecosystem that make it innovative. For some, any cluster that involves multiple types of actors—entrepreneurs, investors, intermediaries such as incubators and accelerators—constitutes an ecosystem. For others, it is a biological metaphor that, when applied to manmade systems, is only partially useful.
Precise understanding of a business ecosystem would help startup entrepreneurs and incumbent businesses compete and collaborate more effectively. This column clarifies the concept in order to identify good use and misuse of the term "ecosystem." It also elaborates its utility when businesses formulate their strategy, and when policymakers wish to promote and regulate business ecosystems.
Ecosystems: What Is Different from Clusters?
The second half of the 20th century saw the rise of global value chains in manufacturing covering dispersed production locations. Clusters—networks of firms co-located in a specific region—developed in some of these locations, each specializing in a product. For example, the industrial districts in Emilia Romagna, Italy, discovered vibrant export markets for their textiles, footwear, machinery, and machine tools. Baden-Württemberg, Germany, has an automotive cluster, with luxury brands such as Mercedes-Benz and Porsche located in close proximity to component suppliers and advanced automotive research institutes. Clusters are more flexible and agile than vertically integrated firms because they can take advantage of both economies of scale and scope.
Why do we need the notion of "ecosystems," when "clusters" or their close cousin "networks" capture much of the phenomenon? Why are people finding it more useful to talk in terms of "ecosystems" rather than "clusters" today? Is this just a fad, or is there something substantive worthy of attention? James Moore in his 1993 Harvard Business Review article first popularized the idea of a "business ecosystem."2 But that was 25 years ago, and we need to re-evaluate its relevance in the light of technological developments since then.
To define a business ecosystem, we focus on a value-creating activity, such as entrepreneurship or innovation, rather than an industrial sector. A business ecosystem therefore tends to cover a variety of industries. There are three meta-characteristics of business ecosystems which, taken together, distinguish an ecosystem from a cluster. Here, I establish what they are and thus the essence of what is going on in an ecosystem (see the accompanying table).
The first characteristic is sustainability. A biological ecosystem is defined as a system that includes all living organisms (biotic factors) in an area and its physical environment (abiotic factors) functioning together as a unit. Just as we identify living things like animals and plants as well as non-living things such as rocks and soil in a biological ecosystem, a business ecosystem consists of humans (for example, entrepreneurs) and environmental structures (such as incubators). Just as there are food chains in which resources are used and recycled in a biological ecosystem, there is a hierarchy of human actors who use and reuse resources in a sustainable manner in a business ecosystem.
Sustainability implies that the ecosystem can thrive without outside influence or assistance. That is, the ecosystem can meet the needs of the present without compromising the ability to satisfy the needs for the future. Sustainability is of course an important theme for public policymakers in cities and regions, and for major businesses for their own survival today.
The second characteristic is self-governance. This implies the ecosystem is not dependent on an outside force, nor is it controlled by a single dominant actor within the ecosystem. There is therefore no unilateral top-down hierarchical control. It also implies that although some activities are governed by a shared set of formal rules and informal norms, the ecosystem allows for the emergence of competing rules or standards that challenge established ones. The self-governing structure is attractive to many who work inside the business ecosystem. On the basis of this definition, it is erroneous to talk about the Wal-Mart ecosystem or the Toyota ecosystem.
The third essential characteristic of business ecosystems is evolution, that is, their ability to evolve over time through competition and experimentation. A biological analogy is the survival of the fittest, which involves combining competition and collaboration between species. Experimentation may be via R&D leading to invention, but also over business models leading to business model innovation.3 In the process of evolution, some species adapt and survive, while others cannot adapt and therefore become extinct. Over a long period of time, some ecosystems thrive, while other ecosystems stagnate or die. These dynamics apply just as much to business ecosystems as to biological ecosystems.
In short, a business ecosystem is a collection of business and other actors with resources operating as an interdependent system. Business ecosystems differ from clusters in sustainability, self-governance, and capacity to evolve over time.
Combining the Digital World with the Physical World
Digital technologies and infrastructure create significant opportunities for business ecosystems. In fact, the ecosystem perspective is particularly useful when applied to digitally mediated ecosystems, but subtle differences persist.
Consider the ecosystems built by platform leaders such as Apple or Google. They provide a technology platform for the purpose of creating a community of supporting producers, notably application software developers. While such an ecosystem may be sustainable over time, complementary producers' hands are quite tied as they share resources and standards on terms set by the platform leader. In this sense, this sort of ecosystem is thin on the meta-characteristics of self-governance and evolution, as its ability to adapt to changing environments is limited by the dominance of a single platform leader.
Other types of ecosystems are more complete in their meta-characteristics. For example, startup ecosystems, be they in Silicon Valley or Bangalore, are communities of stakeholders with resources organized around the process of entrepreneurial opportunity discovery, pursuit, and scale-up. As such, this type of ecosystem is defined as a system of value-creating activity that can be sustainable, self-governing, and evolutionary. To the extent that people and resources are imperfectly mobile, startup ecosystems continue to be embedded in a specific geography, even with the spread of crowdsourcing and virtual communication.
Another notable example is the mobility ecosystem with connected cars, ride sharing, and driverless transportation. This ecosystem is in the making in so-called "smart cities" due to huge potential in exploiting digital technologies. At present, all sorts of actors are vying to become the aggregator of "mobility as service," with a view to reaching a shared goal to make a step change in improving mobility, reducing congestion and pollution, and raising the quality of life of citizens. The mobility ecosystem is geographically anchored, but cuts across industries with competition and collaboration between incumbents (such as automakers and component suppliers) and new entrants (such as technology startups but also incumbents in electronics and telecommunication). Collaboration is also necessary between the private sector (with the likes of Uber and Lyft championing the "sharing economy") and the public sector with its city planners and politicians.
The mobility ecosystem has the promise of being sustainable (because the actors' shared goal is to reduce congestion and pollution), self-governing (though for now with different ideas about the nature of regulatory oversight), and evolutionary (with different smart cities likely to find different solutions to the same problem over time). In this way, the mobility ecosystem helps us focus our attention on the essence of business ecosystems in general.
Ecosystems in the 21st Century
Business ecosystems may be an elusive metaphor for many readers. In this column, I have suggested the term is applicable only when we see elements of sustainability, self-governance, and evolution. The ecosystem perspective will remain particularly useful for the 21st century. I conclude by considering the implications for innovation, corporate strategy, and public policy.
Figure. Different types of business ecosystems.
Being part of a business ecosystem implies that actors are associated with opportunities for value creation and risks of value destruction. In other words, business (and non-business) actors are interested in value "co-creation," but to state the obvious, some win and others lose. Although there has been much recent discussion regarding competition between digital platform ecosystems, we must focus our attention more on within-ecosystem competition between different types of actors. The mobility ecosystem is a good case in point. To win, being a first mover with a novel idea or new technology always helps, but that is not the only way, as I explain below.
Balancing collaboration and competition with a broad range of ecosystem actors is central to engage in cross-cutting innovation. As a business entity, your suppliers are "partners" as well as potential competitors. For instance, in a mobility ecosystem, automakers must treat electronic software providers or public regulators as partners to seek a joint innovative solution for a specific smart city. In this world of partnering, business activities are likely to be evaluated for simultaneously creating value for the business and satisfying social goals. Moreover, business success or failure will depend in part on cultivating skills to facilitate complex coordination of expertise, and to access assets that you do not own. These capabilities create distinctive advantages that some players may leverage to win out in a business ecosystem.
Last and not least, business ecosystems require good governance for sustainability and evolution. This is challenging at the best of times with no easy solution, and should not be a concern just for public policymakers. Business ecosystems pose an extra challenge for regulators because innovation by ecosystem actors tends to use novel technologies and business models for which adequate regulation does not yet exist—think of ride-sharing services or cryptocurrency. Moreover, ecosystems blur boundaries of industries for which traditional regulation has been crafted—think of mobile money that falls between financial regulation and telecom regulation.
Ensuring good governance of business ecosystems may rely on multiple mechanisms. First, new levels of transparency of buyer-supplier rating systems would help maintain good service quality and keep corporate conduct in line. Second, governments may work more collaboratively with private-sector actors who know more about the new technologies and markets to be regulated, though one must beware of "regulatory capture" by powerful interests. Third, governments may endorse outcome-based regulation by becoming "super-regulators."1 Super-regulators approve non-government (profit and not-for-profit) organizations as regulators. Private regulators are then authorized to set their own standards and rules as long as they meet certain outcomes, such as data security or privacy. In today's geo-political world, digital technology enables, but also potentially threatens, the viability of business ecosystems. Thus, business ecosystems would be in trouble if not governed well.
References
1. Hadfield, G. Rules for a Flat World. Oxford University Press, New York, 2016.
2. Moore, J.F. Predators and prey: A new ecology of competition. Harvard Business Review, (1993), 75–86.
3. Sako, M. Business models in strategy and innovation. Commun. ACM 55, 7 (July 2012), 22–24.
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