The Myths and Realities of Business Ecosystems

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

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.