Business Ecosystems

The sudden importance of ecosystems

Over the past few years the idea of the business ecosystem has become very important. As a long term observer of ecosystems I’ve ploughed in this field for about a decade and doubt I truly understand them.

According to consultants Accenture, fully 74 percent of executives believe that business ecosystems (and the platforms associated with them) will be their main source of competitive advantage going forward. According to new research from Gawer, Cusumano and Yoffie about 80% of platform projects (the infrastructure for managing ecosystems) fail. Clearly something so important and so prone to failure needs to be understood better.

So what can they learn from ecosystem champions, such as Airbnb, about the direction and importance of the ecosystem model?

To date, the business community has focused on the platform as the centre-point of the twenty-first-century business model but actually we need urgently to explore where ecosystems will become more significant and what skills and circumstances make them succeed.

The term “business ecosystem”, like many business terms, is used quite loosely. It pays, though, to think closely about what it can and should mean. In some circumstances it is used simply to mean any group or community of companies. Take the term “innovation ecosystem” as an example. It can mean any company in your orbit that supports or helps to supply your innovation needs.

We need a clearer definition. Airbnb might help here.

What you see in the diagram above is that Airbnb controls very little of what happens in its ecosystem. It is the venue for people to sell room space, meals, relationships, and experiences. But the development of this business potential has lain in the hands of self-appointed third parties.

These are people, groups, and companies that might provide property-letting software or access control services. Cleaning services is another area where businesses have grown up spontaneously with no help from Airbnb. Conferences and business improvement services are also officially unrelated to Airbnb’s platform.

Very often when experts talk about ecosystems they refer to the need to orchestrate the third parties within them, as Apple does to some degree with its app developers. But Airbnb does not orchestrate much of the activity you see in the diagram. Instead it relies on its ability to create and communicate opportunity that people want to swarm around.

Let’s look closer.

Ecosystems in context

To date, in business theory, commentators have not devoted a whole lot of bandwidth to the concept of an ecosystem.

Is it just a group of companies or asset owners selling through an online channel? Clearly not, as the Airbnb example shows. Nor is the ecosystem model only about being digital or being a focal point for exchange (such as rooms for money).

Business platforms do provide ecosystem members with ways to utilise assets (like software design capability, content, rides, and rooms) in new ways. However, the model also liberates the platform owner from old cost constraints that usually act as a drag on growth. Instead, business development or innovation costs are devolved onto ecosystem members.

Ecosystem members and business platforms together create a new resource for end customers, often one that is fairly priced at a high level of service.

So those are two elements: a lower cost of innovation and asset reuse. There are others!

The early literature on business ecosystems emphasised what, at the time, seemed to be a new development. Instead of competing, companies suddenly seemed to be cooperating. For example, Intel and Microsoft cooperated in nurturing the WINTEL ecosystem, a grouping that ended up with around seventy-five thousand Value Added Resellers (VARs) or Independent Service Vendors (ISVs). They were all part of the sales, marketing, and implementation of Windows/Intel technology.

From Intel’s point of view the WINTEL partnership stimulated a high pace of innovation in the software industry and that, in turn, drove the release of new chip designs (the Moore’s Law phenomenon).

For Microsoft, the ecosystem was the perfect sales and implementation channel. VARs and ISVs would offer unique solutions to their customers, providing Microsoft with unprecedented channel power.

In The Elastic Enterprise, Nick Vitalari and I contrasted this with the more highly scaled ecosystem that grew up around the iPhone (with over one million developers within five years) and Android (which is now migrating from mobile phones to embedded devices and is bigger than the App Store).

These ecosystems seem to be more spontaneous and free flowing, more organic than the Wintel one. People didn’t need an Apple qualification or certification in order to build an app whereas they needed certification to be a Windows partner. Apple onboarded them through online terms and conditions (T&Cs) forms and selling them a $99 SDK rather than asking them to pay for courses.

The T&C approach was a critical factor in scaling the mobile apps community. It took friction out of scaling, which is now a widely accepted feature of ecosystem-fuelled growth.

Both of these examples illustrate ecosystems in action, yet they’re quite different. So what is it that sets an ecosystem apart? To begin to understand this, it’s helpful to consider Airbnb again.

The asset-lite element

Airbnb’s Experiences program is an ecosystem made in business heaven. What is it exactly and what does it tell us about the ecosystem model?

With its Experiences program, Airbnb enables customers to join a host in a local activity in order to deepen their experience of a journey. For example you can join a Parisian at a café for a breakfast of coffee and croissants or hook into a Kenyan artist’s tour of the Nairobi art scene. Haydn once joined a chef in Paris to cook a traditional French lunch.

Experiences clarifies some elements of what makes an ecosystem. Lately the discussion around ecosystems has focused on the idea that they are asset-free businesses. You may have seen the graphic that says Uber, the world’s largest taxi company, owns no cars. Or that says Airbnb, the world’s largest hotel chain, owns no buildings.

In reality, though, platforms and ecosystems are not defined by being asset-free. Yes, Airbnb is a hotel chain (sort of) without bedrooms but so is Booking.com and any other booking agency.

But while being asset-free is common to many ecosystem businesses, it’s simply a byproduct of a more fundamental characteristic: being built on top of multiple acts of value-discovery.

Airbnb Experiences clearly shows us that ecosystem businesses need have no physical asset whatsoever because you can now trade a way of life instead. This is important because it speaks to how much we now value experience as an asset. But each participant has had to discover that value and how to sell it. In order to do that they need to master content production and dissemination. Experiences are embodied in content. They are also communications projects.

In Experiences, thousands of people have shaped their own value in new ways. They have shaped the content too and communicated it to a global audience.

Similarly the electrical goods company Philips has floated its lighting division as Signify. Signifiy’s mission is to discover new ways of creating value out of lighting, largely by fitting lights with communications devices in order to collect data: the light effectively becomes an ecosystem of data points that Signify can use to create third party opportunity, in analytics or in applications.

The Chinese white goods manufacturer Haier is doing something similar with clothing. Experimenting with RFID tags that communicate when clothing enters a washing machine, and aggregating data on detergent use, Haier can create new insights into clothing longevity, customer style preferences, and who knows what else. The ne result is an opportunity for everybody in fashion, white goods and washing technology to create new value. This too is an ecosystem play.

The ecosystem is key to bringing all kinds of assets into the online environment, including personal ones. It allows the underlying platform to create value both by matching assets with needs and by expanding demand through good content. It uses the advocacy power of ecosystem members to communicate these assets. We’ll come back to the value of content and advocacy, shortly.

Ecosystem management

To further help us understand what makes business ecosystems special, it is worth recalling what Nobel laureate Elinor Ostrom had to say about them. That the fundamental principle of ecosystems is they are in some way self-organising. There tends not to be an authority that sets rules and gives permissions.

The absence, or relative weakness, of centralised authority is a substantial part of the uniqueness of today’s business ecosystems as an enterprise form. In fact, that idea of weak authority exists within a broader dialogue about reducing hierarchy and giving more autonomy to people.

Another characteristic of modern business ecosystems is that they scale efficiently. They do not add proportionally more cost as they grow.

Complex systems’ theorists have shown this to be true of cities and other human activity as well. Complexity of the type found in cities actually lowers resource costs. Compared to non-city habitats, energy costs, for example, are lower, per capita.

There has been some interest shown in the CERN large hadron collider, a collaboration between three thousand scientists with no boss or organisational umbrella, as an example of another type of ecosystem. This moderately scaled ecosystem is a cheaper version of research than a corporate R&D department would be.

The idea of self-governing and self-organising ecosystems would preclude the Wintel community. After all, here was a community that was very much controlled by Microsoft. It’s an important distinction and helps define the more modern ecosystems we are now seeing.

Ostrom in fact argued that ecosystems operate bet under a type of multi-layered authority. That would mean some value-setting by a corporate body such as Airbnb but then different types of authority (conferences organised by third parties for example) that flesh out the overall structure..

The role of information and content

There is an ecosystem community at the heart of the software vendor SAP that is more self-organising and highly scaled than SAP could ever hope to be. SAP’s online community is close to three million members strong and its activities reflect an overlooked and unique element of an ecosystem — the information or content layer.

Look at ARM Holdings and what you see is the development of a unique collective asset: the information it takes to design and apply mobile chips. The distinctive nature of the ecosystem lies in this information production.

Look at Apple’s developer ecosystem and again information is the single asset that stands out. Developers do not have a bilateral relationship with Apple. There are no negotiations or legal agreements other than terms and conditions. But what they do have is a shared information space.

Information is provided in Apple’s SDK and support forums but also through a plethora of websites that are not run by Apple but create quality content about where Apple is headed with its products, what apps are rising and falling, how to market apps, how to develop in-app revenues, and so on.

Good ecosystems rely on the information layer that spreads knowledge and experience and enthusiasm.

Ecosystems defined

What then can we say about ecosystems? While they can be hard to pin down, they generally do possess certain characteristics. These include:

Value-discovery. First, they are marked out by excellent value-discovery around underused assets. That effort is often an informal pooling of know-how across very broad groups of people.

Segmentation and scale. Second, they scale innovation at low relative cost. They tend to do this because the markets they address are finely segmented and can offer different types of value to minute segments of an audience. They are part of what we earlier referred to as microscale.

Self-governance. Third, they tend to be self-governing or have a strong self-governing element. To that end they tend to be governed by T&Cs rather than contracts.

Information, content, and advocacy. Fourth, they have a strong independent information layer where people inform others and advocate for the ecosystem.

That’s not a total definition of the ecosystem but it is a start in trying to see them differently. Too often, by focusing on the platform we miss the fact that ecosystems are an organic response to global connectivity, a self-organising response too. Attempts to plan and roll out ecosystems have another name — they are generally speaking cartels, a form of enterprise that a hundred years ago was outlawed.