We are co-existing in one holistic global ecosystem. There are infinite subsets of smaller ecosystems within that large system – whether the subsets are in the business world, our community, or even in the family.
Due to technological advances across multiple fields and the globalized world we live and operate in today things have become very complex compared to only several decades earlier.
The systemic nature of the environment means that a change to one subset may have an impact on others.
In a business context, this means they are constantly evolving and changing in response to the ever-changing environment.
This can be a challenge for businesses, as they need to be able to adapt and change with the ecosystem to stay relevant and successful.
Businesses as Ecosystems
Like any other ecosystem, businesses are made up of a variety of interacting parts that come together to create a complex, adaptive system.
For businesses to thrive, they must be able to adapt to the ever-changing environment around them.
The components of a business ecosystem include the following:
• The physical environment in which the business operates
• The market in which the business sells its products or services
• The suppliers who provide the raw materials or other inputs that the business needs to produce its products or services
• The customers who buy the products or services from the business
• The employees who work for the business
• The government regulations that apply to the business
• The society where everyone co-exists
The Balancing Act
Each of these components interacts with the others, and they all must be in balance for the ecosystem to function properly.
When one component is out of balance, it can have a ripple effect on the rest of the system.
For example, if the physical environment in which a business operates changes (a new highway is built that makes it easier for customers to obtain the desired product from other retailers also), the business must adapt to stay competitive.
If it doesn’t adapt, it may lose customers to businesses that are more accessible.
Similarly, if the market changes (for example, a new technology emerges that makes the products or services of the business obsolete), the business must adapt to survive.
Failing to do so, it will likely lose its competitive viability (think Borders, Polaroid, etc.).
The key to success for businesses is their ability to adapt to the ever-changing environment around them.
The fourth industrial revolution is upon us
Physical and digital technologies have combined to create a world of efficiency. Every decision-making process will be quicker as we enter the era where analytics provides data for informed choices that lead to success!
The digital era is too complex to go it alone. Companies realize that they need an ecosystem of collaborative partners, suppliers, and customers for their businesses to succeed today.
Business ecosystems—marked by the interdependency of ideas, processes, and technologies—offer unprecedented access to capabilities, resources, and talent on a global scale. By bringing together various players and groups with distinct strengths, a successful ecosystem is able to capture new value, set the stage for innovation, develop and scale solutions, improve customer loyalty, and create sustainable revenue streams. [1]
And this is easier said than done…
As the required rate of innovation rises, firms rely on one another more. These connections can create tremendous vitality in the economy, but they increase the risk of shockwaves capable of cascading throughout the system.
Essential Properties of an Ecosystem
The three essential properties of an ecosystem are its complexity, adaptability, and interdependence.
Complexity refers to the number of different elements in the system and the number of connections between those elements.
The more complex a system is, the more difficult it is to understand and predict how it will behave.
Adaptability is the ability of a system to change in response to changes in its environment. A system that is not adaptable will eventually become obsolete.
Interdependence is the ability of a system to rely on the surrounding environment or systems to thrive and survive.
These properties allow ecosystems to constantly evolve and adapt to their changing environment, ensuring their long-term survival.
How Businesses can Use the Three Essential Properties of Ecosystems to their Advantage?
By understanding and harnessing the three essential properties of ecosystems – complexity, adaptation, and interdependence – businesses can create a competitive advantage and become more resilient in the face of change.
Complexity refers to the fact that ecosystems are made up of a large number of interconnected parts.
This means that they are constantly changing and evolving, and that small changes can often have large ripple effects.
For businesses, this means that it is important to be flexible and agile to adapt to the ever-changing environment.
Consider Sony, which brought out its first e-reader three years before Amazon’s but lost decisively to the Kindle and withdrew from the market in 2014. Because it failed to provide a compelling value proposition that would mobilize key components of the publishing ecosystem—authors and publishers—it could offer only 800 titles when its e-reader launched.
In contrast, Amazon initially sacrificed profits, selling e-books for less than what it paid to publishers. It also invested in digital rights management to spur the growth of its ecosystem. With the support of other stakeholders, it launched 88,000 eBooks ready for download. [2]
Amazon was fast and agile to design a product keeping in mind the complexity of the market and the desire of the consumer.
Adaptation refers to the ability of ecosystems to change and evolve over time in response to the environment.
This is what allows them to remain resilient in the face of change. For businesses, adaptation is key to being able to survive and thrive in an ever-changing world.
Again, Amazon is a prime example of a company that has leveraged adaptability to achieve success. They initially started as an online marketplace for books but have now expanded to include just about everything under the sun!
The online retailer operates in several different ecosystems, such as the e-commerce ecosystem, the cloud computing ecosystem, and the logistics ecosystem.
Amazon has used these ecosystems to its advantage in many ways. For example, by operating in the e-commerce ecosystem, Amazon has been able to reach a global customer base. And by operating in the cloud computing ecosystem, Amazon has been able to offer its customers several innovative services, such as Amazon Web Services (AWS).
In fact, if you look at the company’s history, you’ll realize that adaptability is a part of its DNA.
Interdependence refers to the fact that ecosystems are interconnected and depend on each other for survival.
This means that they are also very resilient because if one part of the ecosystem is damaged, the other parts can often compensate.
For businesses, this interdependence can be harnessed to create a competitive advantage.
By forming strategic partnerships and alliances with other businesses, companies can access new markets and tap into new sources of innovation.
The basic concept of a business ecosystem is that firms cannot be viewed in isolation and that success is not zero-sum. In many respects, whether we thrive or fade depends on the complex, dynamic and interdependent network of suppliers, distributors, workers, competitors, and customers in which we operate.
The Formation of New Ecosystems
Creating a new ecosystem, therefore, can unlock some of the most remarkable opportunities. It takes only a quick glance at the success of some of the great tech platforms to see how transformational it can be: the tech giants encourage other firms to operate on their platforms because they know that the whole will be much greater than the sum of its parts. [3]
Google, Apple, and Facebook are perfect examples. They have offered their platforms for businesses and individuals to use and grow.
In return, they have locked in a hefty sum of money in profits.
This interdependence gives a competitive advantage. The key to a platform is how others can create value on it. As in the case of the examples mentioned above.
If you have a stand-alone product, it doesn’t have much of a platform. In such scenarios, it makes sense to tie up with a bigger platform creating a symbiotic relationship.
What do you think would have happened if Angry Bird tried to enter the market without leveraging Apple’s platform??
By harnessing the power of complexity, adaptation, and interdependence, businesses can thrive in an ever-changing world.
After spending years working to improve their in-car experience and services dashboard, Ford Motor Company quickly made the decision to partner with Alexa and in effect “borrow” all the services bundled within including reading a Kindle eBook, ordering products from Amazon.com, and other voice-activated conveniences.
As a nod to the competitive dynamics inherent in such a decision, BMW soon after began offering Alexa-based services in their vehicles. [4]
Are Complex Adaptive Ecosystems Always Digital?
Interestingly, ecosystems and digitalization have always been interrelated. It is almost impossible to think of one without another. But is that so?
It is easy to think about how this thought process came into being. With the introduction of platforms such as Instagram, Spotify, Facebook, etc. it’s hard to visualize a business without a digital presence.
But this shouldn’t lead us to equate one with the other and ignore the broader set of options that ecosystems provide. Consider pharma company Novo Nordisk, which entered China in 1994.
Novo developed an extensive nondigital ecosystem around diabetes — which was then largely unaddressed in China — by engaging the China Ministry of Health, the Chinese Medical Association, universities, physician groups, patient groups, and non-governmental organizations, by sending buses of experts to rural areas to educate physicians and patients.
The company now has $1 billion in annual diabetes-related sales in China and a 60% market share. A digital platform in this case was not necessary.
Technology can powerfully facilitate the orchestration of multiple players in a complex ecosystem, but successful ecosystems can exist without digital platforms. [5]
The Future…
One of the key features of complex adaptive ecosystems is their uncertainty i.e., we cannot precisely predict their future state. But…
We can collect data, study patterns of change, predict outcomes and take measures keeping those outcomes in mind to minimize undesirable results.
Companies that do this follow a few best practices. First, if they are incumbents, they accept that their business models will be superseded at some point, and they consider how that may happen and what to do about it.
Second, they understand that change often comes from an industry’s periphery—from start-ups or challengers who have no choice but to bet against incumbents’ models.
Third, they collect weak signals from the smart money flows and early-stage entrepreneurial activity that constitute those bets against their models.
Fourth, they practice contingent thinking: Rather than posing the unanswerable question of whether this or that company or technology will succeed, they ask, If the maverick’s idea worked, what would be the consequences for us?
Finally, they take preemptive action against such threats by replicating the idea, acquiring it, or building defenses against it.
The consumer optics firm Essilor, which has grown its top and bottom lines at double-digit rates in a mature low-growth industry for the past several decades, exemplifies this approach.
“Technology is critical but unpredictable, and we can’t control it or do it all ourselves. But we can scan systemically for threats and opportunities, jump on them decisively, and build capabilities to exploit them.”
CEO Hubert Sagnières
This approach led Essilor to acquire Gentex in 1995, making it the world leader in polycarbonate lenses. It also enabled the firm to access and exploit digital-surfacing technology, which had been identified as a major strategic threat some years earlier, by acquiring Johnson & Johnson’s Spectacle Lens Group in 2005.
A major competitive threat was neutralized, and an $8 million business operating at a loss was turned around and grown into a $50 million operation with 35% margins. [6]
Final Thoughts…
Businesses need to be on their toes as they navigate their way through complex, adaptive ecosystems. To keep up with the rapid pace of transformation.
Any company aspiring to manage complex relationships across an ecosystem, like Volkswagen or Alibaba, needs to build the organizational muscle to do so.
Many companies still display the hallmarks of 19th-century organizational design, operating as integrated industrial behemoths that attempt to do or control it all.
If building or joining an ecosystem makes sense, it requires redesigning internal processes to become much more flexible and responsive. [7]
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References:
[1]. Megan O’Brien, Forbes Magazine, 28th June 2018, Going from Solo to Ensemble: Orchestrating An Ecosystem For The Future Of Business
[2]. Martin Reeves, Simon Levin, and Daichi Ueda, Harvard Business Review, January-February 2016, The Biology of Corporate Survival
[3]. Adam Gale, Management Today, 29 January 2018, The secret to growing your business ecosystem
[4]. Chris Pemberton, Gartner, 4th October 2017, How to Make Ecosystems Part of the Business Strategy
[5]. Jack Fuller, Michael G. Jacobides, and Martin Reeves, MIT Sloan Management Review, 25th February 2019, The Myths and Realities of Business Ecosystems
[6]. Martin Reeves, Simon Levin, and Daichi Ueda, Harvard Business Review, January-February 2016, The Biology of Corporate Survival
[7]. Jack Fuller, Michael G. Jacobides, and Martin Reeves, MIT Sloan Management Review, 25th February 2019, The Myths and Realities of Business Ecosystems
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