Literature Review


Let’s start with a quick overview of the history of ecosystems. The rationale for why you can gain a competitive edge through a business ecosystem is quite straightforward: a company’s competitive advantage depends, at least in part, on how effectively it co-opts the complementary capabilities, resources and knowledge of the network of firms, institutions and individuals that are around it.  That ‘business ecosystem’, as James Moore described it in 1993, is a network of organisations and individuals that co-evolve their capabilities and roles and align their investments to create additional value and/or improve efficiency (Moore, 1993).  This was not a new idea. The management of the Commons in mediaeval Britain was based on a network of such partnerships. These partnerships preserve individual incentives and a degree of autonomy. The system provides flexibility while enabling parties with complementary capabilities to jointly contribute to the creation of value. Studies of the woollen textile cluster in 14th Century Prato, Italy, estimated to involve in its time some 24,000 people, show how specific artisans and traders contributed to and leveraged the mutual strength of a network.

Many centuries later, leveraging a similar network propelled clothing companies such as Italy’s Benetton and Spain’s Zara into the global market.

These ecosystems often proved more effective than other forms of organisation. In a research project by the Environmental and Cultural Conservation in Inner Asia (ECCIA) from 1992 to 1995, satellite images were used to compare the amount of land degradation due to livestock grazing in the regions of Mongolia, Russia, and China. In Mongolia, where shepherds were permitted to move collectively between seasonal grazing pastures, degradation remained relatively low at approximately 9%. However, degradation in Russia and China, which implemented state-owned pastures involving immobile settlements, and in some cases privatisation by households, was much higher at around 75% and 33%. The collaborative effort on the part of the Mongolians proved much more efficient in preserving grazing land respectively (Ostrom, 1999).

Geographic clusters are another type of organisation with a long history. Alfred Marshall mentioned them in his seminal ‘Principles of Economics’ published in 1890, where he characterised clusters as a ‘concentration of specialized industries localities’ that he termed ‘industrial districts’. He argued that concentrating industries in specific regions created four types of advantages: knowledge spill overs, a skilled labour pool, development of supporting industries, and sharing of resource inputs (Kazokawa, 2011). Since Porter’s Competitive Advantage of Nations (Porter, 1990), the term has been associated with an important element of dynamic industrial development in Central and North-Eastern Italy. There, after the Second World War, clusters of small and medium-sized enterprises (SME) experienced strong growth. One of the reasons that these industrial districts thrived in Italy was because they brought together in one place different firms engaged in producing a very specialised product.

There is a long history, therefore, of different mechanisms that companies, and individuals have used to come together and leverage the complementary capabilities and knowledge of potential partners. But if mechanisms and structures that enabled companies to gain the benefits of reaping network economies were so effective and widespread, why then did managers come to neglect them?

From the late 19th Century, the quest to reap economies of scale became the driving force for business in industry after industry. This led to three key developments that meant that the Commons and clusters, lost importance. First, the quest for economies of scale favoured the standardisation of products and processes so that they could be easily controlled and repeated. Second, the pursuit of growth and scale had led to the internationalisation of business. As business activities spread across the globe, it became more difficult to rely on coordination through proximity, mutual adjustment and face-to-face interactions. Third, in the quest for standardisation and economies of scale, the architecture of many products became more modular. This allowed the emergence of complex international supply chains where tightly defined interfaces between the participants enabled efficient coordination and uncertainty reduction.

At the same time, working with ecosystems, based on shared ownership and co-ordination between self-interested parties, began to get a bad name among economists. Hardin published an article in the journal Science entitled, ‘The Tragedy of the Commons’ (Hardin, 1968). One of his arguments was that if all the members of a group used the common resources for their own gain and with no regard for others, then all the common resources would eventually be depleted. The argument advanced in the ‘Tragedy of the Commons’ became widely accepted until Ostrom and her collaborators revisited it (Ostrom et al, 1999). They found that the ‘tragedy of the commons’ was neither prevalent nor difficult to solve; and locals often came up with solutions to the problem themselves. The tide thus began to turn in favour of looking for ways to cooperate that went beyond the limitations of corporate hierarchies, bureaucracies or impersonal markets. Pure self-organisation could not always be relied upon. The simple governance structures observed by Ostrom may well work for local, tangible resources such as grazing or fisheries, but it was not clear how it would translate to the management of resources that transcended well-defined boundaries. These included resources such as the earth’s atmosphere and its implications for climate change, air pollution, or those with potential international spill-overs, such as oil resources. The management of knowledge shares similar problems. Many types of knowledge are not easily contained within well-defined geographic or corporate boundaries. Thus, while the idea of promoting the business cooperation and resource sharing that characterised the Commons and industrial districts of the past is back in vogue, it is unlikely that those benefits will be achieved if we wait for them to self-organise. Therefore, what we see in the quest to re-discover the advantages of the old Commons and industrial districts and clusters is the emergence of a hybrid organisational form that sits between the extremes of a corporate hierarchy and a free market (Adler, 2001). The concept of ecosystems popular again, and BCG observed in 2019 in one of its publications that in annual reports the term “ecosystem” occurs 13 times more frequently now than it did a decade ago (Pidun, Reeves and Schuessler, 2019)

After the rediscovery of the value of commons, or ecosystems as Moore called them, management scholars have invested identifying in the factors leading to success in managing them. Iansiti and Levien (2004) described the ecosystems of Walmart and Microsoft and explained how these ecosystems lay at the core of the success of these companies. They suggested how to measure the relative health of an ecosystem and introduced the concept of a keystone, that would help an ecosystem leader to monetise its contribution to the ecosystem.  Adner (2006) helped us to understand where ecosystems apply to innovate and what the risks involved can be. He also contributed by sharpening the concept and to present what he calls a grammar for characterizing ecosystem structure, and a characterization of the distinctive aspects of ecosystem strategy. He offers an explicit examination of the relationship among ecosystems and a host of alternative constructs e.g. business models, platforms, coopetition, multisided markets, networks, technology systems, supply chains, and value networks that helps characterize where the ecosystem construct adds insight for the strategy literature (Adner, 2017). In our own early research, we came up with six keys to unlock the ecosystem advantage (Williamson and De Meyer, 2012). Jacobides et al (2018) provide an excellent overview of what we know about managing ecosystems and how the type of complementarities between partners shapes the ecosystem. In Jacobides et al (2019) combined the insights from the academic and consulting world to distill five success factors for digital ecosystems: don’t be obsessed by being the first but take your time to craft a strategy and value proposition and to attract the right partners; build a strong user base; develop a deep bench of partners; go for a big global footprint and have a wide geographical scope; and select the right mix of collaborators. These suggestions provide insight into success factors, but also begin to suggest how to go about starting up an ecosystem. Because it is this question of how to build and grow an ecosystem and that we most often encountered in discussions with managers and executives, we decided to address it in this paper. In answering this question, we will take the standpoint of what we call the ecosystem leader, or the company that takes the initiative to design and catalyze the development of an ecosystem.

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Starting up an Ecosystem for Innovation – Literature Review

by EcosystemEdge