The Myths and Realities of Business Ecosystems
Before determining an ecosystem strategy, organizations must first shift to a new perspective and way of thinking.
In annual reports, the term ecosystem occurs 13 times more frequently now than it did a decade ago.1 But like any buzzword, it’s often overapplied. The term has been used to refer to everything from a country (“China is the second strongest ecosystem…”) to a support function (“the HR ecosystem”), a portfolio of products (“the Darico ecosystem is made up of 5 products”), and even a bundle of services intended to make people happy (“a happiness ecosystem”).2
Behind this semantic overstretch, however, lies a substantive new phenomenon: the rise of dynamic, multicompany systems as a new way of organizing economic activity. Seven of the world’s 10 largest companies, all using technology to disrupt not only their sectors but broad swaths of the economy, now depend on such systems, and ecosystems thinking is more prominent in faster-growing companies across the S&P 500.3
Ecosystems are attractive partly because of the new possibilities they create for products and services spanning traditional boundaries — often using digital platforms, APIs, internet of things technology, and new tools for data gathering and analysis. The growing interest is also driven by necessity: Business environments are evolving more rapidly, requiring the rapid acquisition and coordination of diverse, novel capabilities.
The rise of ecosystems requires a new way of thinking about business — the ecosystems perspective. If we can describe this unique perspective and clear up the myths and confusion surrounding the use of the term, we will put ourselves on good footing to design strategy effectively in ecosystems.
The Ecosystems Perspective
The essential characteristics of business ecosystems are the following: They are multi-entity, made up of groups of companies not belonging to a single organization. They involve networks of shifting, semipermanent relationships, linked by flows of data, services, and money. The relationships combine aspects of competition and collaboration, often involving complementarity between different products and capabilities (for instance, smartphones and apps). Finally, in ecosystems, players coevolve as they redefine their capabilities and relations to others over time.4
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At a fundamental level, ecosystems provide new ways of managing the trade-off between flexibility and commitment. In general, companies can either make flexible decisions, as in launching a pilot project, or they can commit themselves to a particular strategic path, which is often necessary to reach efficient scale and secure competitive advantage.
1. BCG Henderson Institute analysis, based on annual and other SEC filings, for global public companies with sales of more than $10 billion or more than $20 billion in market capitalization.
2. B. Joffe, “Ecosystem 101: The Six Necessary Categories to Build the Next Silicon Valley,” Techcrunch, Sept. 1, 2012; Business Wire, “Accenture Extends Its Partner Cloud to Integrate With 3rd-Party HR Systems,” May 15, 2018; Darico, “Following Strong Pre-ICO Investor Interest, Darico Launches an Entire Investment Ecosystem,” Jan. 16, 2018; Fosun, “Latest News,” June, 2018.
3. According to BCG Henderson Institute analysis as of last quarter of 2018, across the S&P 500, companies that mentioned ecosystems in their annual reporting included Alphabet, Amazon, Apple, Facebook, Microsoft, Alibaba, and Tencent. These companies had annualized revenue growth 1% to 4% higher than those that did not, over two-year periods from 2012 to 2017.
4. M.G. Jacobides, C. Cennamo, and A. Gawer, “Toward a Theory of Ecosystems,” Strategic Management Journal 39, no. 8 (August 2018); R. Kapoor and R. Adner, “What Firms Make Versus What They Know,” Organization Science 23, no. 5 (September-October 2012); and K.M. Eisenhardt and C. Galunic, “Coevolving: At Last, a Way to Make Synergies Work,” Harvard Business Review 78, no. 1 (January-February 2000).
5. Jacobides, Cennamo, and Gawer, “Toward a Theory of Business Ecosystems.”
6. C. Pemberton, “How to Make Ecosystems Part of the Business Strategy,” Gartner, Oct. 4, 2017; R. Welborn, “4 Ways to Build Your Business Ecosystem (and Why It Matters),” Business 2 Community, July 18, 2018; and A. Gale, “The Secret to Growing Your Business Ecosystem,” Management Today, Jan. 22, 2018.
7. M.G. Jacobides, S.G. Winter, “The Co-Evolution of Capabilities and Transaction Costs: Explaining the Institutional Structure of Production,” Strategic Management Journal 26, no. 5 (May 2005): 395-413.
8. M. Reeves, K. Haanaes, and J. Sinha, Your Strategy Needs a Strategy (Boston: Harvard Business Review Press, 2015).
9. M. Reeves and A. Bernhardt, “Systems Advantage,” Boston Consulting Group, June 1, 2011.
10. D. Wellers, “Beyond Industries: Ecosystems of Co-Innovation Drive the Future,” Forbes, Feb. 14, 2018.
11. P.C. Evans and A. Gawer, “The Rise of the Platform Enterprise,” The Center for the Global Enterprise, January 2016.
12. M. Reeves, M. Zeng, and A. Venjara, “The Self-Tuning Enterprise,” Harvard Business Review 93, no. 6 (June 2015).
13. S. Perez, “PayPal Expands Partnerships With Citi and Chase to Include Reward Points and More,” TechCrunch, July 20, 2017.
14. M. Reeves, “Algorithms Can Make Your Organization Self-Tuning,” Harvard Business Review, May 13, 2015.
15. “Creating a Connected Data Ecosystem,” AMP Agency, July 12, 2017; and “5 Building Blocks to an Analytics Culture,” Ellucian, July 18, 2017.