The end of strategy in business ecosystems?
There has finally been a consensus among strategy scholars that a new era demands a new way of organizing business: that is the business ecosystem.
Business ecosystems are boundaryless organizations of interdependent businesses with customer-centric offerings across industries. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving relationship in which each entity must be flexible and adaptable to survive as in a biological ecosystem. Rather than following strict and deliberate top-down strategic directives, business ecosystems are managed by heuristic principles and data-driven insights. They are never-ending reorganizations of business.
Considering the emergent nature of business ecosystems and increasingly short-lived competitive advantages, what is the role of strategy as we know it? To what extent can we develop and execute a strategy across a multitude of loosely coupled organizations? How desirable is it to do so? It is one thing to realize the changing origins of competitive advantage of business ecosystems, it is a whole other thing to discover if and how strategy is to be designed and executed in such an emergent organization. The challenge of strategizing in business ecosystems is to unite deliberate with emergent strategy processes that are no longer in the hands of an executive team.
How did we get here?
At the end of the 1970s, Tom Peters announced that we should move beyond the matrix organization to match accelerating business environments. More recently, James Moore discussed the death of competition by emerging ecosystems. Gary Hamel declared we should bust bureaucracy for more agile ways of organizing. Michael Jacobides showed why business ecosystems would make industry analysis obsolete. And then McKinsey estimated in 2018 that just twelve ecosystems will account for 30 percent of global revenues by 2025.
Ecosystems are quickly emerging as a way for businesses to organize themselves. Fundamentally, business ecosystems consist of an orchestrator, a set of complementing businesses, or complementors, and a system – usually a digital coordination mechanism – that holds everything together, making the sum of the parts greater than the whole. Or, in business terms, the offerings of business ecosystems better meet the needs and wants of the customer than individual offerings. Organizations are increasingly moving away from rigid pyramids of organizational roles and responsibilities, towards hybrid forms of organization with increased autonomy and resilience.
Most companies are not business ecosystems. Why does it matter for everyone’s strategy?
Which companies organize themselves as business ecosystems? Are these not just a handful of American tech giants? Often, we hear these questions in executive exchanges and indeed, the usual suspects are Google, Microsoft, Amazon, Facebook, and Apple. But, a business ecosystem as an innovative way of organizing is not only found in pioneering tech giants from the USA. In fact, we find great examples of business ecosystems on the other side of the world. Think about Alibaba, Tencent, Baidu, and more recently Xiaomi and Ping An from China. In fact, the list is getting longer, quicker. In our research we have identified around 40 companies that meet a relatively strict definition of a business ecosystem. These companies range from digital technology, automotive, healthcare, entertainment, to consumer appliances, manufacturing, and even steel. Business ecosystems are no longer the exclusive domain of big tech.
Even if these emerging organizations are showing relevance across the board, 40 companies are just a fraction of the landscape. Although some claim that these few organizations are going to capture a (very) large part of value added to the economy, for many executives the question remains to what extent business ecosystems are relevant for them. Typically, executives ask if they are part of someone else’s business ecosystem and if so, how that would matter. A good tool to identify a company’s position in business ecosystems is the ecosystem map. Such a tool allows an organization to figure out the possible ecosystem membership(s) – are you in or out of how many ecosystems? – and the respective role – are you de facto orchestrating an ecosystem or playing a complementing role?
But in all cases, regardless of whether your company is orchestrating a business ecosystem, just contributing to one or relatively distant from any business ecosystem, the way you develop and execute strategy to create a competitive advantage in this new reality, is changing in two ways:
- First, the source of competitive advantage in times of business ecosystems is From cost and differentiation to network effects and complementarities; from sustainable advantages to temporary advantages. In other words, the “what” of strategy has changed for business ecosystems.
- Second, the way strategy is developed and executed is From top-down prescriptive strategy to balancing deliberate and emergent strategy processes in real time; from executive team strategy design to co-dependent strategizing with ecosystem partners. The “how” of strategy has changed for business ecosystems.
Consequences of these emerging organizations for competitive advantage
The source of competitive advantage in the business ecosystem age is changing. Julian Birkinshaw highlights the decreasing importance of resource – and positioning advantages. He calls this the “moat” advantage. Instead, he argues that companies should focus on ensuring a continuous and sticky flow of users in a network of ecosystem partners. Or what he calls the “turnstile” advantage. Similarly, Marco Iansiti and Karim Lakhani have highlighted the role of being positioned as a node, creating strategic bottlenecks, in capturing more value than others. Rita Gunther McGrath made a powerful case several years ago that companies may better create a continuous flow of transient competitive advantages, competitive advantages that come and go as conditions change. Rather than to be in search of the one sustainable competitive advantage based on an asset or position, McGrath suggests there is no longer such a thing.
And, in a broader context of digital technology, Sunil Gupta explains how cost and differentiation are no longer sufficient sources of competitive advantage. Rather, he claims that companies that create network effects and complementarities for other companies, are more likely to win in digital times. Fundamentally it appears that ownership of assets – in the widest definition of the word – is being trumped by ownership of user – or better, the user touchpoints. In designing relevant strategies for the ecosystem era, executives must reconsider on what basis their competitive advantage rests. The what of strategy is challenged. What about the how of strategy?
Strategizing in business ecosystems: the codependence of strategies
Strategizing refers to the process of designing and executing a strategy. And this process is challenged in the context of a business ecosystem. In our research with leading business ecosystems around the world, we find a specific challenge of strategizing in business ecosystems: the codependence of strategies. The figure below illustrates this challenge.
Any business ecosystem will face the same situation: the strategy of the orchestrator will influence the strategic options that the complementors in the business ecosystem have and vice versa. This is not a problem of governance or alignment; it is a problem of codependence. Codependence of strategizing here refers to how the design and execution of a strategy by an ecosystem actor affects and is affected by the other ecosystem’s actors.
The direct consequence is that the executive team of a company is no longer the only strategic decision maker. Moreover, this is not a one-off challenge, as business ecosystems continuously change membership and each member faces ongoing changes in their respective sectors and related strategies. However smart the internal process of a given company in a business ecosystem is, it will not be possible for any executive team to have enough and timely insight to deal with the complexity of dozens or hundreds of strategies across the business ecosystem. Especially as this requires not only strategies but also feedback on their execution, which necessitates operational level data. How to go about this?
Digital exchange mechanism for strategizing: the cases of Alibaba and Ping An
Think about Alibaba, one of China’s leading business ecosystems. The orchestrator is Alibaba Group, in particular the ecommerce trading platforms, and there are hundreds of complementors in over 20 different sectors. For instance, AliHealth, a digital healthcare platform, Ele.me, a food delivery service, or InTime, a brick and mortar retail mall chain. Any of these complementors have their own strategies to grow and none of these complementors are business units of Alibaba. They are autonomous businesses with a management team and strategizing executives. After all, ecommerce is rather different from digital healthcare, fintech, or operating shopping malls. As members of the business ecosystem they have access to certain resources, for instance payment solutions, management systems in the cloud, and logistics, but also limitations. For instance, it would not be possible for Ele.me to block Alipay as a payment service, or to partner up with another ecommerce platform that competes directly with Alibaba’s ecommerce platforms. These resources and limitations affect the strategic options of the complementor, even though they are independent and autonomous businesses.
This also works the other way around. Alibaba Group as an orchestrator benefits from the collective offering of their complementors. In other words, customers of Alibaba will be increasingly locked-in to the ecosystem as the offering of the whole business ecosystem becomes more relevant. But, the orchestrator can only deliver on its promise as long as the complementors offer what is expected. If, for instance, Ele.me changes strategic direction and moves out of their delivery business, Alibaba has to adjust their strategy by, for example, divesting Ele.me if the new strategy is creating competition, or by investing in another company to be able to keep up the delivery business. So, the orchestrator’s strategy is codependent with the complementors’.
How did Alibaba solve this challenge? Think about how Alibaba‘s business ecosystem is effectively managing over 2 million merchants across hundreds of businesses and dozens of “industries.” Alibaba has managed to develop an exchange mechanism that captures real time insights of the complementors: third party payment (Alipay), cloud service (AliCloud), logistics (Cainiao), and communication (DingTalk) among others. This collection of shared digital services is de facto representing a mechanism of digital exchange with limited transaction costs. The latter is crucial because if the transaction cost of such exchange is too high, ecosystem members will not participate. Alibaba’s business ecosystem has become a data-driven, well-oiled machine of transactions and information: a “smart business” as coined by Ming Zeng, former chief strategy officer of Alibaba Group.
In fact, we see a similar pattern of strategizing with Ping An, the world’s second largest insurance company. Ping An Group is an orchestrator of about five main complementing businesses with hundreds, if not thousands, of partners. While Ping An is focused on insurance, banking, and investment, the complementors are in digital healthcare (Ping An Good Doctor), wealth management (Lufax), smart city solutions (Ping An Smart City), second- hand cars (Ping An Good Car), and real estate (Ping An Good Home). None of the complementors are business units and they operate with strong autonomy of the Group. And they face the same codependence of strategizing as the complementors in Alibaba’s ecosystem. In contrast to Alibaba, Ping An does not have a set of digital shared services that enable low cost digital exchange. Instead, Ping An’s business ecosystem has one specific company, Ping An Tech, that fulfils this role in the ecosystem. Ping An Tech was established in 2008 in response to an ongoing large scale digital transformation of the insurance business. Its original aim was to support existing businesses with technology services. But by 2015 the role of Ping An Tech had transformed into the guardian of data flowing throughout Ping An business ecosystems and across the complementors. In our conversation with the former chief strategy officer of Ping An Tech it became clear that the primary responsibility was indeed data governance, while also initiating, managing, and monitoring strategic growth initiatives from both the orchestrator - the Group, in insurance, banking, investment – and from the complementors – in the diverse areas of healthcare and smart city development among others.
The digital exchange mechanisms, such as Alibaba’s Alipay and AliCloud, or Ping An’s Technology business, may appear to be mainly focused on building massive data lakes. While this is certainly true, there is an equally important role of real time capturing, transmitting, and analysing of operational data of each ecosystem member for drawing business insights for strategizing in the ecosystem.
Strategizing as a self-tuning process in a business ecosystem
Interestingly, in both cases the digital exchange mechanism not only solves the challenge of codependent strategizing. It also provides a specific ecosystem advantage for strategizing. The process of exchanging not only information but also market feedback data of the design and execution of strategies by both the orchestrator and the many complementors is automated. In the above figure, that means the middle layer of the business ecosystem is deeply automated, thereby increasing responsiveness to changes in the complementors’ businesses and resilience as a system due to continuous feedback loops into the strategies. By automating the middle layer through a digital coordination mechanism – albeit Alipay or Ping An Tech – strategizing transforms into a real time, iterated process across the business ecosystem.
A closer look at the strategy processes in business ecosystems reveals the challenge of codependence but also hints at an ecosystem’s unique advantage. There’s no doubt that business ecosystems will pose a challenge to executive decision makers: strategy is going to move away from the executive team to the business ecosystem.
Mark Greeven is Professor of Innovation and Strategy at IMD. He is the author of Business Ecosystems in China (Routledge, 2017) and Pioneers, Hidden Champions, Change Makers and Underdogs: Lessons from China’s Innovators (MIT Press, 2019).
This chapter is a long form extension of https://www.imd.org/research-knowledge/articles/Is-it-the-end-of-strategy-in-business- ecosystems/