Harnessing the rising power of ecosystems: how to win in a post-COVID-19 world
Michael G. Jacobides
"There are decades”, the Russian revolutionary Vladimir Lenin noted, “where nothing happens, and there are weeks where decades happen.” We are in just such a fast-forward period with the COVID-19 crisis, a natural experiment in the making, where the very foundation of businesses is put into question, combining with the emergence of ecosystems as a dynamic new way to organize economic activity.1
Setting the stage for change
As with tectonic change, what seems sudden and abrupt is actually the result of structural, gradual shifts happening in the background. For a while now, significant forces have been transforming the way businesses organize.
The development of railways and the telegraph, and the growth of the stock market underlaid the growth of the modern industrial corporations at the turn of the 19th century, catalyzed by crises such as wars and pandemics. Likewise, rapid changes in Information Technology (IT), the rise of globalization and, crucially, changes in regulation, underpinned the dissolution of firm and industry boundaries in the last quarter of the 20th century. Outsourcing, hollowing out, and industry convergence reshaped the competitive landscape, opening the way to the corporate giants of the 2000s.
From the beginning of the 21st century, another structural force was added to the list – digital platforms, which rose to prominence just as the Global Financial Crisis was brewing. Around these platforms, key orchestrators have built ecosystems of collaborators, reshaping the nature of competition.
Big Tech, used by all, feared by many, has founded much of its success not on technology alone, but rather on being able to transform existing sectors, and expanding their reach through the use of business (digital) ecosystems.2 Indeed, one of the key features of the early 21st century has been the growth of a genuinely new organizational form. Standalone companies are increasingly yielding pride of place to ecosystems, fluid networks of organizations combining to deliver bundles of products and services in new and unfamiliar ways. And just like the step from single- to multicell organisms in nature, they represent a profound evolutionary shift.
Ecosystems, both enabled by and resulting from big changes in the ways we consume and produce, are developing at remarkable speed.3 A McKinsey4 report suggests that by 2025, today’s 100-plus industries and value chains will have collapsed into a dozen or so multitrillion-dollar ecosystems accounting for some $60 trillion in revenues – one third of the global total. It adds that new configurations will feature “a few large orchestrators, big winners, and a huge shift of wealth and value creation.” Boston Consulting Group (BCG) found that the use of the word “ecosystem” in large companies’ annual reports had grown 13-fold over the last decade and that those that used it grew much faster than those that didn’t.5 Firms like Haier, the innovative Chinese white goods group, are changing their business model to harness the power and flexibility that ecosystems can afford them. The most recent articulation of Haier’s managerial philosophy, named RDHY, aims to transform the firm into one based on “Ecosystem Microenterprise Communities” (EMC).
COVID-19 has sped up these changes: with the forced acceleration of digitization, Big Tech power and the transformative role of platforms and ecosystems have received a boost. Apple, Google, Facebook, Microsoft, Amazon in the West, and Tencent and AliBaba in China have become stronger than ever, as confinement at home has made us more dependent on digital devices. As solutions to get out of the crisis require us to use digital technology, clouds of tech regulation seem to be dispersing.
New ways to collaborate and compete seem to be emerging. Firms like luxury purveyors LVMH and Burberry have converted perfume and clothing lines to turn out hand sanitizers and medical gowns, while Dyson is redeploying vacuum-cleaner-design skills to ventilators. More relevant yet, competition does not happen between firms, but rather through a web of interconnected organizations. Pharma giants GSK and Sanofi are pooling immunity knowhow and sharing with researchers worldwide to fast-forward promising new vaccines. A wider consortium embracing 17 firms stretching over pharma, biotech, and venture capital is evolving at top speed to share data, identify the most promising molecules, and speed them into trials, with priority focus on treatments not already being tested elsewhere.6 The crisis is leading to the creation of new webs of relationships – ecosystems that are responding creatively and cooperatively to a societal threat, with innovations happening in all directions. Companies are looking beyond organization, industry, and sector boundaries to see opportunities for contribution that didn’t exist even two months ago.
At the same time, the circumstances are bringing up a host of new questions that we have to address, as societies. A new way of organizing also means a new way to regulate. Technology and entrepreneurial drive that underpin ecosystems can bring us important new solutions, as long as we find the right way to connect players and leverage data (both corporate and consumer). In healthcare, for instance, what role should healthcare providers and insurers play? And what about telco giants like Vodafone and T-Mobile, handset makers like Samsung and Huawei, or the providers of mobile OS like Android (i.e., Google) and Apple? How do we feel about the service-ization of data, and the generation of advertising revenues? The point of regulation is not to protect outdated incumbents, but to facilitate dynamism while addressing the real risk of excessively powerful firms – an agenda we’re ill-prepared to serve.7
Finally, what link should there be between the private and public spheres? The Chinese government has long fostered collaboration with tech companies, but Western societies have different views on the sharing and use of data. In China, social apps are permitted to track current and former COVID-19 patients, working with municipalities. How can we protect consumers, ensure competition, preserve privacy, and keep the innovative momentum in a world of ecosystems? The current pandemic has given us much to consider.
Adapting to a new world order
Ecosystems are temporary organizations that create thick but impermanent webs of relationships, all geared to addressing particular business issues or opportunities.8 As the current crisis shows, systemic issues can require quick redeployments that can happen when entrepreneurial drive allows, or circumstance obliges, people to look both inside and outside their own boundaries. So, while the pandemic is obviously a special case, it represents in extreme form the new demands placed on organizations and those who manage them in this unfamiliar new world.
What is certain is that in many areas, change will be permanent: there have been too many dislocations for any easy “return to normal.” Like any crisis, COVID-19 will create winners as well as losers.9
By the end of it, old habits will have been broken, new ones formed. “WFH” is already an accepted abbreviation, and the benefits of home working (for those that can) in terms of time, convenience, and urban congestion, not to mention savings in office rents, are probably too great to permit an easy return to the arrangements of the past. Restaurant chains and owners worry that fear of infection, together with the convenience of home delivery, will mean that eating out will never resume its previous popularity. University teaching and doctors’ visits will increasingly be conducted online. Many of the changes are not temporary blips: they will transform how business is done, even if they don’t suppress demand. As companies look to boost the resilience of supply chains through on- and near-sourcing, automation will very likely increase.
And these are only the obvious examples. When clear-cut industries and categories ruled, companies competed to deliver the same mass-produced product – but not in how the underlying service was delivered. You could have any means of mobility, as long as you bought your own car; any way of talking to people far away, as long as it was on a phone. To that extent, customers were captive and the winners were those who upset their customers least (in retrospect, not such a big ask to make of managers).
As we have been seeing over the last few years, however, offerings can be sliced, diced, orchestrated, and bundled for delivery in myriad new ways. The fast-evolving mobility ecosystem is a good example.10 No longer just about car ownership, it is now coming to look like a growing sheaf of user-centric services for integrating other parts of passengers’ lives. Just as you can already ask Google maps for directions from London to Paris, or Norwich to Nantes, it will be possible in the future to order the complete journey with a single click or phone call. Or you could sign up for a monthly “take-what-you-want” mobility subscription service – a blend of public transport, private car, taxis, and car- and ride-sharing services to suit the particular circumstance. This will create new opportunities to mine supplementary sources of value. One example is entertainment for a captive passenger audience – raising the intriguing possibility that eventually these secondary sources of value become so lucrative that mobility comes free in return for our personal data, as with online search and social media. In turn, these changes will affect the value of other services from insurance and healthcare, to the need and value of parking.
As the scope broadens, it becomes ever more important to understand, and understand deeply, the “jobs to be done.” What demands emerge from how customers actually live their new lives? The pandemic poses the question with added urgency. To stick with mobility, consider for example Hyundai’s artificial intelligence (AI)-based Blue Link app, which can track your vehicle, monitor and report on driving behaviour, and perform various remote actions on the car. One of these is a one-time-only door lock and unlock. So, in combination with car-wash app WashOS, you could – from your office – ask someone to locate your parked car, valet it, and return it ready for collection after work.
More to the point in these troubled times, you could have a grocery order or medical supplies delivered into the boot. Hyundai touted the app as “enhancement of the connected driving experience”; you might call it mobility, retail, convenience, or even emergency. The more critical the job, the greater the opportunity.
How old management reflexes can lead you astray
What goes for what we used to think of as the auto industry also goes for the economy as a whole, where a wholesale reorganization of sectors across business and society is taking place before our eyes. While rear-guard battles for hierarchical control of sectors continue to rage, smarter firms and leaders are experimenting with the new ways of organizing that opportunities emerging in these wider ecosystems demand. Software may be not so much eating as modularizing the world, making the boundaries between sectors and technologies more porous, and at the same time increasing the need for close coordination. Add to that the advent of the full Internet of Things and 5G, and the range of technological capabilities will only expand, along with the roster of potential partners able to offer them. A BCG study recently reported that more than 50 percent of ecosystems involve partners from five different industries and 90 percent involve participants from five or more countries.11
As technology allows us to redesign our world, this kind of choice makes two things all but certain. First, offerings won’t be delivered in the way they are now. Second, your company is most unlikely to play the central role.
For many CEOs, this may be hard to accept. They assume that their job is to create their own ecosystem. But as COVID underlines, this is a folie de grandeur. The reality is that few companies have the exceptional brand, data, platform-shaping skills, scale, or financial assets to become the “orchestrator” of an entire ecosystem, particularly under today’s pressures. And even firms with significant muscle might want to think twice before grabbing the lead role. We’re talking ecosystems – not ego-systems.
Leaders must be prepared to nudge or influence their ecosystems, not control them. Letting go of control is tough – even for some of today’s celebrated ecosystem orchestrators. Apple’s iPhone only took off when Steve Jobs reluctantly opened up the App Store to outside developers, launching an ecosystem that now numbers more than two million apps and 500,000 publishers.
In the new world, value obeys a different gravity. Above all, it flows to where the information is. Consider the rise of the tech titans. In striking contrast to even the recent past, the chief asset of the most valuable companies in the world – Apple, Alphabet, Amazon, Microsoft, and Facebook – is data. By comparison, their tangible assets are meagre. Not coincidentally, each is at the center of several overlapping ecosystems and also participates in others. (Once again, the pandemic is a sharp illustration of the general principle. Understanding and dealing with the outbreak is all about data, whether demographic, medical, or epidemiological, and many of the emerging networks have as their explicit object its generation as raw material for or guidance for decision-making closer to the front line.)
Don’t be surprised then if it’s one of these data giants – or another outsider like Uber – that ends up as orchestrator of the emerging mobility ecosystems, rather than a traditional carmaker. Despite a common misapprehension, ecosystems are not supply chains. And there’s no guarantee that even very large companies that sat at the top of their supply chain will go on to play the lead role in an ecosystem.
The implication of all this? Most firms will participate in ecosystems not as orchestrators but as “complementors” – suppliers of supplementary technologies, brands, or capabilities. But even this will be less straightforward than it might appear – and again, not amenable to “ego-system” tactics.
The new structures needed to win in a world of ecosystems
Even if the direction of travel is clear, we also need to revisit our organizational structures, and decide who will be managing this complex web of relationships. Ecosystems, by construction, require firms to be “extrovert” and focus not only on the needs of their clients but also the needs of their complementors and partners. This means we need to have the internal flexibility to find ways to identify the right ecosystem structures, broker arrangements, and shepherd a vast array of participants well outside an organization’s formal boundaries. How can we make this happen?
The answer may need to be to do more than create new job labels. While new roles like “ecosystem manager,” “platform developer,” and “evangelist” are becoming increasingly widespread, we are now witnessing the early stages of the significant organizational transformation that will be required. In Haier, for instance, the shift towards becoming the “ecosystem brand” has been accompanied by an acceleration of the radical decentralization programme advocated by its charismatic CEO, Zhang Ruimin.12 His managerial philosophy (Rendanheyi, from Ren meaning “employees,” dan “user value,” and heyi “alignment” which refers to the alignment of the wealth generated by employees autonomously and the shared value) was shifted to support alignment in the creation of ecosystem value. Haier, which envisaged its fridges sitting at the center of a wider “Internet of Food” and its washer dryers interconnected with an “Internet of Clothes,a decided to delegate responsibility to its employees, making them owners of “Ecosystem Micro-enterprise Communities” (EMCs) tasked to contract internally within Haier but also externally, and linking with those well outside the organization. Ecosystem revenues are monitored and recognized, and sought by the organization.
Other competitors tend to be more centralized, and do not delegate decision-making authority and responsibility to the same extent. Xiaomi, which has invested in one of Haier’s competitors, Midea, seems to be more centralized, but still wants to draw on its front-line employees to help support its ecosystem reach. Western Big Tech appears to favour a mix between centralization and decentralization, and traditional industrial firms that take innovation seriously are trying to find new ways to empower their staff to drive new ecosystems. Often, these efforts to create ecosystems need to involve the firms’ leadership not only to ensure some consistency (and coordination of efforts) but also because the quest for an ecosystem strategy often requires regulatory buy-in, as firms like Philips are discovering in their effort to transform (digital) healthcare.
How to resolve the issues of authority and entrepreneurship, “pulling one’s weight” and nimbleness, drive and initiative in ecosystems is at the cutting edge of our understanding. While some skills (like empathy, negotiating ability, and the creativity to design collaborative structures with payoffs for a host of participants over time) will become more important for sure, we are still on the lookout for the right structures and the right tools to help organizations adapt. Research on these topics and engagement with firms is ongoing, so – watch this space.
Success requires a rigorous reality check
For companies that can learn to navigate the post-COVID-19 landscape, there will be substantial growth opportunities on offer. Fresh cross-boundary collaboration can give firms access to new intellectual property, help firms merge physical and digital channels, and advance new technologies. In short, ecosystems offer participants a way of developing new revenue streams from products and services that they could not have brought to market by themselves.
To make the most of these opportunities companies will need to link their survival strategies with a ruthless strategic rethink.13 By using its lessons, this crisis can be the foundation of an important rebound. Ventures founded in times of downturn have the greatest chances of success. There are more good people and more reasonably priced opportunities in dislocated markets, competitors may be distracted, and this time around, governments are keen to provide liquidity. The debris from the COVID-19-induced recession will dot the landscape with fresh opportunities.
Answering the questions asked by the new circumstances will be challenging. So will the organizational change that stems from them. But think of today’s crisis as providing a high-pressure test bed for the ways of thinking and organising that all companies will have to get used to as a “new normal” emerges – an immunization against the future, if you like. After all, what are companies responding to today’s emergency actually doing? They are contributing their best knowhow or facilities to pop-up ecosystems geared to solving an urgent global problem for the common good. They are improvising at speed, innovating as they go, without certain knowledge of where the initiative will take them. Circumstances in the shape of covid-19 dictate the purpose. As the projects evolve, they will almost certainly spin off into other opportunities. Even if they don’t, the learning from this existential experience will stand them in good stead in the shape of resources that up till now have evoked more talk than action: resilience and agility.
Most ecosystems are driven by data. But nothing could illustrate better that thriving in them will depend less on technological expertise than on the irreducibly human qualities of intuition, the ability to improvise, and the empathy to put yourself in someone else’s shoes, plus the creativity to turn whatever you find out into a strategy. Forget ego – it’s all about eco.
Michael G Jacobides is Sir Donald Gordon Professor of Entrepreneurship and Innovation and Professor of Strategy and Entrepreneurship at London Business School. He is a Thinkers50 ranked thinker.
1 For a guide, see, “In the ecosystem economy, what’s your strategy?”, Michael Jacobides, Harvard Business Review, September-October 2019.
2 World Economic Forum White Paper on Digital Platforms and Ecosystems, Michael G Jacobides, Arun Surandanrajan & Marshall Van Alstyne, February 25, 2019.
3 For an overview of ecosystems, see “Myths and Realities of Business Ecosystems,” Jack Fuller, Michael Jacobides, and Martin Reeves, Sloan Management Review, Digital Article, March 2019.
4 Competing in a world of sectors without borders, Venkat Atluri, Miklós Dietz, and Nicolaus Henke, McKinsey/Digital:Insights, January 2018
5 Do You Need a Business Ecosystem? Ulrich Pidun, Martin Reeves, and Maximilian Schüssler, BCG Henderson Institute Publications Online, 27 September 2019.
6 COVID R&D: Pharmas align behind crowdsourcing solution, Simone Fishburn, Biocentury, 16 April 2020.
7 Michael Jacobides, “Amazon’s ecosystem grows bigger and stronger by the day, should we be worried?”, Forbes.com, May 15, 2019.
8 Goodbye business as usual, Michael Jacobides, Think! at London Business School, 30 October 2019.
9 Michael G Jacobides and Martin Reeves, “Rethink, reconfigure and reallocate to win in the new normal,” Harvard Business Review, September/October (scheduled) 2020.
10 Opportunities in the future of transport, Michael G. Jacobides, Think! at London Business School, 19 March 2018.
11 Michael Jacobides, Nikolaus Lang, Nanne Louw, and Konrad von Szczepanski, “What does a successful ecosystem look like?”, Boston Consulting Group Online Publication, 26 June 2019.
12 Michael Jacobides & Lisa Duke, “Haier’s RDHY 2.0 – preparing for a world of ecosystems”; and “Haier in 2019: An ecosystem revolution and RDHY 3.0”, London Business School Cases, April 2020.
13 Michael G Jacobides, “The delicate balance of making an ecosystem strategy work,” Harvard Business Review, November 2019.