Summary by Jae Johnson
Master of Accountancy Program
University of South Florida, Fall 2004
The purpose of this paper is to provide a framework for determining the health of a company's position in the competitive environment by using an analogy that relates business systems to biological ecosystems. The idea is that companies compete in business ecosystems.
What is a Business Ecosystem?
A company's business ecosystem consists of all the companies, organizations or groups of people that directly or indirectly affect the company. Good examples include suppliers, distributors, creditors, technology providers, regulatory agencies, complementary product manufacturers, outsourcing companies, competitors and even customers.
When trying to identify an ecosystem, it is impossible to find clear cut boundaries. Therefore, it is useful to only pick out the companies that have the greatest interdependencies and the most profound effects on the organization. Defining a company's ecosystem is likely to produce a long list of relationships and interdependences. After identifying this system of connections with other companies and agencies, the next step is to separate the list into common groups, perhaps based on their function within the ecosystem.
Each of these groups, especially the critical ones, should be healthy in order for the ecosystem to function properly. A weakness in any one of the critical groups could destabilize the system. “The implosion of the internet bubble made it obvious that members of a network share a common fate, meaning that they could rise and fall together” (p. 71).
Assessing Your Ecosystem’s Health
According to the authors, there are three critical measures of health: productivity, robustness, and niche creation. The most important measure of an ecosystem’s health is its “ability to consistently transform technology and other raw materials of innovation into lower costs and new products” (p. 72). Perhaps the best way to measure this is return on invested capital.
Secondly, a network should be robust enough to be able to survive unexpected disruptions. Being a part of a robust ecosystem often allows for more predictability. Also, having such relationships can act as a buffer from such outside disruptions. A good “measure of robustness is the survival rates of ecosystem members, either over time or relative to comparable ecosystems” (p. 73).
Finally, an ecosystem needs to be able to create a niche. As in a biological ecosystem, a business network needs to be able to support variety and have diversity to be capable of absorbing external shocks and stimulating innovation. The measure suggested to capture this is an “ecosystem’s capacity to increase meaningful diversity through the creation of valuable new functions, or niches” (p. 73). To evaluate the ecosystem’s ability to form niches, see how the ecosystem is embracing emerging technologies to develop new products or businesses.
The Keystone Advantage
A keystone organization is one that aims to enhance the overall health of the network by creating value and sharing value. “Keystones can create value and increase ecosystem productivity by simplifying the complex task of connecting network participants to one another or by making the creation of new products by third parties more efficient” (p. 73). They can also share value, increase robustness and influence niche creation by sharing innovative technologies. A good example of a keystone organization is Wal-Mart. It has provided a procurement system that connects the retailer with its suppliers to help match supply with demand on a real-time basis, thus benefiting the entire ecosystem.
The Dangers of Domination
An ecosystem dominator is pretty much the opposite of a keystone organization. Instead of adding value, a dominator may drain the system (value dominator) or even take over the system (physical dominator) by exploiting a critical position. A value dominator indirectly affects the system by extracting as much of the value the other members of the ecosystem have created possibly not leaving enough value to sustain the system. On the other hand, a physical dominator directly affects the system by aiming “to integrate vertically or horizontally to own and manage a large proportion of a network” (p. 75).
Leveraging a Niche
A niche player aims to specialize and differentiate itself from other members in the system. “When they are allowed to thrive, niche players represent the bulk of the ecosystem and are responsible for most of the value creation and innovation” (p. 77).
If a company uses a niche strategy, it must be cautious about its network and analyze which companies are, or will become, keystones or dominators. A niche player’s livelihood depends upon its ability to overcome any conflicts that may arise between itself and these other, perhaps larger, players. If it does not effectively protect itself it could be swallowed up by these other stronger players. Sometimes, a niche player has to find a way to leverage or detach itself from being dependent on a keystone in order to keep the keystone from sucking too much value from the niche player.
It is important to note that roles in a network are dynamic. For instance, keystones may become dominators and niche players may eventually become keystones. Defining the business environment or ecosystem, and recognizing the company's position within the system, helps the company identify which strategy to follow. The key ideas related to choosing an ecosystem strategy are provided in the graphic illustration below. Note that the level of turbulence and innovation (vertical axis) and the complexity of the relationships within the system (horizontal axis) helps identify the company's position and appropriate ecosystem strategy.
The analogy drawn in this article between a biological ecosystem and a business network has a number of overall implications for managers. First, interdependency is central to a company’s performance. “A company’s performance is increasingly dependent on the firm influencing assets outside its direct control” (p. 78). Also, with the use of these resources outside its own organization, integration represents an important type of innovation. Furthermore, the nature of technological evolution changes. “Rather than involving individual companies that are engaged in technology races, battles in the future will be waged between ecosystems or between ecosystem domains” (p. 78).
Finally, a company can not make any decisions without first determining what the effects will be on the entire ecosystem or network. To do so would be to ignore the decision’s true effect. The authors use AOL and Yahoo as examples to demonstrate this important implication. AOL and Yahoo financially weakened their dot-com partners with aggressive deals while the internet was booming. This temporarily boosted their individual performance, however the overall effect on the network was destabilizing and eventually disastrous (p. 78). It is for these reasons that managers should consider the framework provided in this article while formulating their organizations' strategies. Defining a company's business ecosystem and identifying the company's place in the system will help promote the overall health of the ecosystem as well as their own long-run survival and prosperity.
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