Ecosystem thinking is increasingly seen as essential: 68% of corporate business leaders say that ecosystems and partnerships is the only way to succeed in the market.
James Moore defined the term business ecosystem in 1993 as a network of organizations and individuals that co-evolve their capabilities and roles, and align their investments to create additional value and/or improve efficiency. Ecosystem relationships take many forms, such as alliances, intellectual property and data-sharing relationships, co-branding initiatives and other collaborative structures. These relationships are designed to create value that no single participant could achieve by itself. By leading an ecosystem and joining forces with other entities, aligning capabilities, sharing resources, driving collaboration, expanding knowledge and improving scalability, business ecosystems have become a key success factor in responding to disruption, accelerating innovation, responding to changing customer needs, being more agile, discovering new sources of value, and driving growth.
In 1997, James Moore authored The Death of Competition and Professors Adam Brandenburger and Barry Nalebuff wrote Coopetition; each signaled a shift in the paradigm for thinking about business strategy. At the time, the value chain model articulated by Professor Michael Porter—a static and linear relationship from raw materials through production processes to customers—was dominant, but academics were beginning to describe “value networks.” Moore, Brandenburger and Nalebuff took the ideas a step further, seeing business relationships not as zero-sum negotiations between customers and suppliers but as symbiotic relationships between entities that could collaborate as well as compete to accelerate innovation and increase growth.
That way of thinking—business as ecosystem—has become inescapable as global supply chains, online marketplaces for skills as well as goods, and remote work have become the world’s economic infrastructure. It’s an idea whose time has come, given new urgency by the drive to diversify supply chains to increase resiliency to supply shocks, whether motivated by political shifts, fracturing of too-brittle supply chains, or natural disasters. As the COVID-19 pandemic has demonstrated, robust resilience programs play a critical role in a business’s adaptation and survival in a crisis and beyond.
In today’s dynamic, connected, volatile business world, ecosystem thinking is increasingly seen as essential: in a recent EY study, 68% of corporate business leaders said that ecosystems and partnerships were the only way to succeed in the market.
The importance of resilience
In nature, many ecosystems have survived even catastrophic events, from oil spills and forest fires to droughts and flooding. What characteristics set them apart?
In business, some companies have been able to pivot and reconfigure operations at short notice during the recent pandemic, from restaurants that repurposed to sell food and supplies direct to consumers, to companies that redeployed agricultural drones to disinfect public spaces. What characteristics set them apart?
What sets apart the businesses that have been able to pivot and reconfigure operations at short notice during the recent pandemic?
The answer is resilience – the ability to recover and bounce back from difficult events. So, what creates resilience, and how can we build these characteristics into our business ecosystems?
While there is much that we can learn about designing, creating, shaping and managing resilient ecosystems from nature, below are four areas I’d like to highlight:
- Building diversity
- Mapping interdependencies to ensure mutual symbiosis
- Adapting continuously
- Identifying complementary niches
1. Building diversity
Biodiversity is a key factor of healthy natural ecosystems. Genetic diversity, as well as the number of species, within an ecosystem boosts productivity, ensures sustainability and makes it more likely to withstand natural disasters. The risk of one species falling victim to disease, for example, is offset when another species can take its place or perform a similar role.
Diversity is strongly linked to the productivity of an ecosystem and its ability to provide multiple functions and services. For example, there is solid evidence that increasing the number of species in an ecosystem yields benefits such as productivity and stability.
Another factor in creating and maintaining resiliency is the connectivity between ecosystems. Overall, maintaining or even enhancing connectivity between ecosystems can positively influence the level of resiliency of each ecosystem. The US Department of Agriculture, for example, keeps a library of species of corn at the ready, lest a new blight affect one of the very few strains cultivated in the United States.
Applying this to business ecosystems, it is worth thinking about:
- Diversity of members: from startup to large corporation, each member has a role to play. Getting a good representation of different industries and regions is also important.
- Fabric of the ecosystem: what are the design principles of the ecosystem, how complex is it, how many members do you have, what are the different roles within the ecosystem, what is the right portfolio of members, what is the shared value of the ecosystem, etc.
- Processes: what is the governance of the ecosystem, how open or close is it, what commitments are expected from members, what trade contracts are in place, what agreements regarding data sharing and flow are in place, do processes favor one segment of the ecosystem or are they equal, how will these processes create value, etc.
2. Mapping interdependencies to ensure symbiosis
All organisms in an ecosystem depend upon each other. If the population of one organism rises or falls, then this can affect the rest of the ecosystem. Ideally you want a state of mutual symbiosis, where two or more species live purposefully in direct contact with each other to the benefit of all. Think of bees and pollination: when bees collect nectar from flowers, they gain a food source while the plants benefit from pollination through the hairs on the bee’s body, thus ensuring reproduction.
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The goal of ecosystems is to create win-win value-driven scenarios for all members, where the benefit to the whole ecosystem is greater than the individual benefit to each member.
To create that level of mutual benefit, ecosystem leaders should map the interdependencies in their ecosystem and ensure they understand the potential impact of any changes to members of the ecosystem. The goal is to create win-win value-driven scenarios for all members, which lead to outcomes where the benefit to the whole ecosystem is greater than the individual benefit to each member (e.g., 1+1=4 and not 1+1=2). Hiding in plain sight, the relationships among electronics suppliers, phone marketers, app stores, and developers is one of many examples of an intensely connected ecosystem, continually tuning itself to shifts in technology, opportunity, and consumer preference.
3. Adapting continuously
Natural ecosystems live in a constant state of flux. Nothing is static. This is true of the business world as well, where ecosystems must be in a state of continuous adaptation to ensure resilience and continued relevance. Although the right ecosystem design is a critical success factor in long-term success, any ecosystem must take into consideration the need for ongoing creativity and innovation, continuous changes in stakeholder behavior and preferences, as well as the impact of megatrends on the longevity of the ecosystem. Overall, the capability to adapt as an ecosystem is an important measure of strength. Conversely, players seeking to hold back the evolution of the ecosystem of which they are a part are squandering scarce resources.
During the pandemic, for example, one of the key challenges for supply chains was erratic demand for goods; e.g., demand for clothing slipped while demand for cleaning supplies surged. These unusual spikes and slumps strained traditional modelling techniques. Businesses that widened their inputs to include data and indicators from more sources, such as supplier and customer data, financial and commodity indexes, government databases and social media feeds, were able to discern more effective supply and demand signals and quickly develop adaptive responses.
4. Identifying complementary niches
In nature, the “competitive exclusion principle” states that two species with identical niches cannot coexist indefinitely. In the UK, for example, the endangered, native red squirrel has largely been replaced by the gray squirrel due to habitat loss and disease. In order to avoid extinction, one species must develop a unique niche where it can operate and live. Ultimately, having niches can drive coexistence in an ecosystem.
The fact that so many species in a vast array of ecosystems can coexist means that species must differ in their realized niches. Such niche differentiation is critical to avoid competitive exclusion and allow coexistence. Niche differentiation refers to differences among species in their physiology, morphology and behavior, as well as in their use of resources and tolerance of conditions.
In nature, life finds a way to inhabit every niche as microclimates change or the built environment encroaches on natural habitats; similarly, innovators create new niches whenever new markets or technologies evolve.
So, what could this mean for business ecosystems? Long-term success will rely on crafting ecosystem relationships based on coexistence and niche positions for every member. This is true even of companies and competitors. Identifying potential niches in the ecosystem can also help to ensure complementary roles for all. To participate, businesses must understand and be able to articulate their strengths and weaknesses, so that niche strategies can be co-developed. Creating a coexistence model in the ecosystem can foster faster and better innovation across multiple players in the ecosystem. In nature, life finds a way to inhabit every niche as microclimates change or the built environment encroaches on natural habitats; similarly, innovators create new niches whenever new markets or technologies evolve.
Also, by recognizing the need for niches, the ecosystem can benefit from key members who bring their sub-ecosystems into the primary ecosystem, thus expanding the members and benefits. What Joseph Schumpeter described as “gales of creative destruction” can be re-expressed as the ongoing evolution of the business ecosystem.
Building and measuring success
Recent experience has taught us that businesses need to be ready for anything. Intentionally building strong ecosystems can help organizations to be more adaptive and resilient. While not everything from nature is applicable to business, there is a nearly four-billion-year-old library of lessons learned from constant evolution, growth and innovation – and some recurring patterns and principles that we can learn from.
Which leads us to the question of measuring the health of an ecosystem. How will you know if your ecosystem is working successfully, not just for you but for all members? Whether it is helping to deliver long-term value for all members of the ecosystem? There are different measures for ecosystem leaders to consider, such as the size of the ecosystem, the recruiting or separation levels of/from ecosystem members, the ability to expand with new products and services or into new markets, the ability to outpace the innovation of competing ecosystems, etc.
As collaboration increases and more businesses join ecosystems, no doubt more sophisticated measures of their value and overall health will emerge. In the future, other aspects that could serve as health indicators include the condition of the ecosystem’s components, resiliency levels or functionality levels. Ultimately, this will need to be explored as a group, to ensure that relationships are seen as productive and beneficial to all.
It is clear that in an era of unlimited connectivity and accelerated disruption, leading and being part of an ecosystem can provide competitive advantage. No company can survive alone. Ecosystems have the power to create new industries or even shape existing industries, and we are likely to see competition among companies evolve to competition—or coopetition—among ecosystems. As CEOs and companies try to reframe their future and transform, here are some questions for leadership and the board to consider.
Questions for the boardroom
- How well did we adapt to COVID-19 and what improvements can we make to be more agile and responsive in the next crisis?
- Do we need to model our business ecosystem explicitly? Would that help us do better scenario planning?
- How diverse is our ecosystem: do we have sufficient variation in the size of entities (from startups to large corporations), member roles, industries and geographies?
- Does our risk framework take into consideration our ecosystem, resiliency levels and how to mitigate potential risks?
- Are there any other ecosystems we can align with to create mutually beneficial outcomes?
- How do we report to ecosystem members on different performance measures and indicators?
- How can we measure the productivity and value of the ecosystem as a whole and for each of our members?
Summary
Understanding business ecosystems is a key success factor; done well, this framing helps to accelerate innovation, respond to changing customer needs, improve agility, develop new sources of value, and drive growth. Ecosystems in nature offer many lessons applicable to business. In particular, the four key attributes of diversity, symbiosis, continuous adaptation and identifying complementary niches can help to create more resilient, successful ecosystems.
