According to Marco Iansiti and Roy Levien, in heir research paper, ‘Strategy as Ecology,’ Wal-Mart’s and Microsoft’s dominance in modern business has been attributed to any number of factors, ranging from the vision and drive of their founders to the companies’ aggressive competitive practices.
What Is a Business Ecosystem?
Consider the world around us. Dozens of organizations collaborate across industries to bring electricity into our homes. Hundreds of organizations join forces to manufacture and distribute a single personal computer. Thousands of companies coordinate to provide the rich foundation of applications necessary to make a software operating system successful.
Many of these organizations fall outside the traditional value chain of suppliers and distributors that directly contribute to the creation and delivery of a product or service. Your own business ecosystem includes, for example, companies to which you outsource business functions, institutions that provide you with financing, firms that provide the technology needed to carry on your business, and makers of complementary products that are used in conjunction with your own. It even includes competitors and customers, when their actions and feedback affect the development of your own products or processes. The ecosystem also comprises entities like regulatory agencies and media outlets that can have a less immediate, but just as powerful, effect on your business.
Drawing the precise boundaries of an ecosystem is an impossible and, in any case, academic exercise. Rather, you should try to systematically identify the organizations with which your future is most closely intertwined and determine the dependencies that are most critical to your business. If you look carefully, you will most likely find that you depend on hundreds, if not thousands, of other businesses. It is helpful to subdivide a complex ecosystem into a number of related groups of organizations, or business domains. These may in some cases represent something as well defined as a conventional industry segment. Each ecosystem typically encompasses several domains, which it may share with other ecosystems.
For an ecosystem to function effectively, each domain in it that is critical to the delivery of a product or service should be healthy; weakness in any domain can undermine the performance of the whole.
From their earliest days, Wal-Mart and Microsoft—unlike companies that focus primarily on their internal capabilities—have realized this and pursued strategies that not only aggressively further their own interests but also promote their ecosystems’ overall health.
They have done this by creating “platforms”—services, tools, or technologies—that other members of the ecosystem can use to enhance their own performance. Wal-Mart’s procurement system offers its suppliers invaluable real-time information on customer demand and preferences, while providing the retailer with a significant cost advantage over its competitors.
Microsoft’s tools and technologies allow software companies to easily create programs for the widespread Windows operating system—programs that, in turn, provide Microsoft with a steady stream of new Windows applications.
In both cases, these symbiotic relationships ultimately have benefited consumers—Wal-Mart’s got quality goods at lower prices, and Microsoft’s got a wide array of new computing features—and gave the firms’ ecosystems a collective advantage over competing networks.
The Ecosystem Edge
Each of these ecosystems today numbers thousands of firms and millions of people, giving them a scale many orders of magnitude larger than the companies themselves and an advantage over smaller, competing ecosystems.
Most companies today inhabit ecosystems that extend beyond the boundaries of their own industries. The moves that a company makes will, to varying degrees, affect its business network’s health, which in turn will ultimately affect the company’s performance—for ill as well as for good.
But despite being increasingly central to modern business, ecosystems are still poorly understood and even more poorly managed. We offer a framework here for assessing the health of your company’s ecosystem, determining your place in it, and developing a strategy to match your role.
In the case of Microsoft, the company’s performance depends on the health of independent software vendors and systems integrators, among many others.
Microsoft and Its Ecosystem
Assessing Your Ecosystem’s Health
So what is a healthy business ecosystem?
What are the indications that it will continue to create opportunities for each of its domains and for those who depend on it?
There are three critical measures of health—for business as well as biological ecosystems.
Download Iansiti & Livien’s Strategy as Ecology >
Marco Iansiti is the David Sarnoff Professor of Business Administration at Harvard Business School in Boston. Twitter: @marcoiansiti and @digHBS
Roy Levien is the manager and a principal at Keystone Advantage, a technology consultancy in Lexington, Massachusetts. They are the authors of The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability (Harvard Business School Press, 2004). The authors have had consulting relationships with several companies mentioned in this article. Iansiti can be reached at [email protected]; Levien can be reached at [email protected].
