A business ecosystem is the network of organizations — including suppliers, distributors, customers, competitors, government agencies, and so on — involved in the delivery of a specific product or service through both competition and cooperation. 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 in order to survive, as in a biological ecosystem.
The Origins of the Business Ecosystem Concept
The concept first appeared in Moore's May/June 1993 Harvard Business Review article, titled "Predators and Prey: A New Ecology of Competition", and won the McKinsey Award for article of the year.
Moore defined "business ecosystem" as: "An economic community supported by a foundation of interacting organizations and individuals — the organisms of the business world. The economic community produces goods and services of value to customers, who are themselves members of the ecosystem. The member organisms also include suppliers, lead producers, competitors, and other stakeholders. Over time, they co-evolve their capabilities and roles, and tend to align themselves with the directions set by one or more central companies. Those companies holding leadership roles may change over time, but the function of ecosystem leader is valued by the community because it enables members to move toward shared visions to align their investments, and to find mutually supportive roles."
Moore used several ecological metaphors, suggesting that the firm is embedded in a (business) environment, that it needs to co-evolve with other companies, and that “the particular niche a business occupies is challenged by newly arriving species.” This meant that companies need to become proactive in developing mutually beneficial ("symbiotic") relationships with customers, suppliers, and even competitors. Using ecological metaphors to describe business structure and operations is increasingly common especially within the field of information technology (IT). For example, J. Bradford DeLong, a professor of economics at the University of California, Berkeley, has written that "business ecosystems" describe “the pattern of launching new technologies that has emerged from Silicon Valley”. He defines business ecology as “a more productive set of processes for developing and commercializing new technologies” that is characterized by the “rapid prototyping, short product-development cycles, early test marketing, options-based compensation, venture funding, early corporate independence”. DeLong also has expressed that the new way is likely to endure “because it's a better business ecology than the legendarily lugubrious model refined at Xerox Parc — a more productive set of processes for rapidly developing and commercializing new technologies”.
Mangrove Software, The Montague Institute, Kenneth L. Kraemer, director of the University of California, Irvine’s Center for Research on Information Technology and Organizations and Stephen Abram, Vice President of Micromedia, Ltd., Tom Gruber, co-founder and CTO of Intraspect Software, Vinod K. Dar, Managing Director of Dar & Company, have all advocated this approach.
Types of Business Ecosystems
Business environments express themselves in different ways. We can look at a business ecosystem from a macro view (country level or industry level), or a micro view (company level). Business environments may also be local (a city's neighborhood) or global (Linux, and the entire ecosystem around it).
- Macro-business ecosystems: A community of organizations lead the macro-business environment. This shows up to promote a change of legislation by programs, such as industry standards (Bluetooth) or lobbying. Their overall goal is specific and focuses on assisting a common interest sector or community of organizations.
- Micro-business ecosystems: There are two main types of ecosystems at a micro-level, which are as follows:
- Captive business ecosystem: One entity controls the whole network of organizations and people involved, and the big decisions are centralized.
- Decentralized business ecosystem: It self-regulates the environment. The specific open source technology helps to coordinate collaborative market ecosystems. The BitTorrent network or the Blockchain networks are the examples for this case.
Basic Business Ecosystems
There are two basic types of business ecosystem that can be observed in practice: solution ecosystems, which create and/or deliver a product or service by coordinating various contributors, and transaction ecosystems, which match or link participants in a two-sided market through a (digital) platform. (See figure below)
- Solution Ecosystems. In its most basic form, a solution ecosystem has a core firm that orchestrates the offerings of several complementors. During the development of a new solution, suppliers to the core firm or to important complementors can also be part of the ecosystem because they are independent and their innovation activities must be coordinated with the other players. Once the basic innovation is accomplished, such suppliers may be restricted to a reduced role in a hierarchical supply chain. In solution ecosystems, the customer is typically not an active member but has a big impact by selecting and combining the offerings of the core firm and the complementors. In addition, intermediaries (such as retailers and other sales agents) may participate in the ecosystem because their activities must be aligned with the other players (not shown in figure below). Consider semiconductor lithography—the process by which circuit designs are imprinted on a semiconductor wafer—as a simple example of a solution ecosystem. At the core of the ecosystem is the lithography tool, which includes an energy source and a lens system. For the lithography tool to create value, it needs two complements: a circuit mask, which holds the circuit design to be replicated, and a chemical resist, which reacts when exposed to the energy source to replicate the circuit image on the mask onto the silicon wafer. The enormous advances in semiconductor lithography over the past six decades, which enabled the doubling of the number of transistors that can be placed on a chip approximately every two years, required technology revolutions in all components of the semiconductor lithography ecosystem and close collaboration and co-innovation among the independent companies. 2 Other examples of solution ecosystems include credit card systems (linking merchants, consumers, and banks), smart home solutions (combining climate, lighting, entertainment, and security products and services), and 3D printing (integrating providers of printers, substrates, software, and services).
- Transaction Ecosystems. Transaction ecosystems are characterized by a central platform (today in most cases facilitated by digital technology) that links independent producers of products or services with independent customers. Examples of such platform businesses are abundant. Think of eBay, which links independent sellers and buyers; Uber, which links drivers and riders; and Upwork, which links freelance workers with companies. Transaction ecosystems are two-sided markets that benefit from direct and indirect network effects. Direct network effects occur when participants value the offering more as the number of other participants on their side of the market grows (such as users of fax machines or social networks). More important, indirect network effects emerge when the value of the ecosystem for the participants on one side of the market increases with growing numbers of participants on the other side. For example, an increasing number of drivers attracts additional customers to a ride-hailing platform, which in turn will attract even more drivers, resulting in a positive feedback loop. In this way, and in contrast to solution ecosystems, customers are an integral part of transaction ecosystems. They not only create one side of the market but also contribute data and feedback to the ecosystem. Sometimes, customers even switch into the role of producers—for instance, when viewers on YouTube post their own videos or when tenants on Airbnb offer their own homes on the platform.
The two ecosystem archetypes differ not only in their structural form and types of members, but also in their purpose, success factors, and value creation mechanism. The purpose of a solution ecosystem is to create a coherent solution. The core firm is an orchestrator that must motivate and coordinate the innovation activities of the complementors, ensure continuous improvement of the overall product, and safeguard fair value sharing among ecosystem members. Value is created by identifying and removing bottlenecks in the overall system and by exploiting super modular complementarities (which exist when more of component B leads to increasing returns for component A). Solution ecosystems typically capture the value they create by selling their solution as a product or service.
By contrast, the purpose of a transaction ecosystem is matchmaking: identifying the best fit between the specific needs of a customer and the specific offering of a producer, and facilitating the subsequent transaction. Value creation in a transaction ecosystem is thus driven by the number of successful transactions and their benefits to both sides of the market. For example, a ride-hailing platform creates value by finding the nearest driver for a given passenger, establishing trust between the two through curation and insurance, and performing financial settlement. In addition to establishing and facilitating the matchmaking mechanism, the role of the platform orchestrator is to manage access to the platform, establish standards and rules, and set incentives for both sides of the market in order to grow the ecosystem and exploit network effects. Monetization of transaction ecosystem value is frequently based on transaction fees, charging for advertising, or both.
When you consider building or joining a business ecosystem, you need to be clear about what type would be the best way to realize your value proposition. Sometimes both solution and transaction ecosystems are viable, and we increasingly see shifts between the models and hybrid forms. For example, the Apple iPhone started as a solution ecosystem, with Apple as core firm coordinating a coherent solution with component suppliers, app developers, and telecom providers, but after the introduction of the App Store, it also became a platform and marketplace for selling apps. On the other hand, Airbnb was established as a transaction ecosystem but has recently started to build a solution ecosystem by inviting outside developers to integrate additional applications and services into the platform (such as tools to make travel arrangements or to simplify guest check-in, cleaning, or linen delivery). Similarly, LinkedIn has moved toward a solution ecosystem model after its acquisition by Microsoft.
Dimensions of Business Ecosystem
Ecosystems enable organizations to respond and exist in an increasingly digital world, assuming that CIOs and senior IT leaders consider the eight dimensions when making strategic decisions about how to participate and when to change tactics.
- Dimension 1: Ecosystem Strategy: Bottom line: Every organization exists in multiple business ecosystems. These business ecosystems are dynamic networks of entities interacting with each other to create and exchange sustainable value for participants. The challenge is deciding how your organization will survive and thrive in its ecosystem. Know that ecosystems can emerge organically or deliberately. Organic business ecosystems are created based on evolving industry, government and market trends. Deliberate business ecosystems might emerge in a more planned manner — for example, Amazon’s ecosystem of sellers, buyers, advertisers and collaborators. Decide what role your organization will play in these ecosystems: Leader, disruptor, niche player, orchestrator, or something else.
- Dimension 2: Degree of Openness: The degree of openness within ecosystems is driven by strategies, common goals and shared interest. An ecosystem may be public, private or a hybrid. Many organizations actually participate in a hybrid of public and private ecosystems. The openness of an ecosystem has two implications. The degree of change is dependent upon the possibility of new entrants and disruption to relationships and value. It will also define the nature of the relationships in the ecosystems and how they are formed and maintained. It will define the nature of collaboration and competitions.
- Dimension 3: Engagement of Diverse Participants: With increased connectivity, organizations will need to figure out how to integrate things like smart advisors and artificial intelligence into their ecosystems. CIOs need to understand that the diversity of an ecosystem and the roles that people, businesses and things play will change and evolve depending on the situation. For example, the primary person in an ecosystem may be a business customer, and then, suddenly, a smart advisor will take over the roll. This constant situational change will determine how solutions are defined and supported.
- Dimension 4: Types of “Relationships”: With 7 billion people and more than 30 billion devices connected to the internet by 2020, interconnection will create an ecosystem challenge. Digital platforms — wherein participants with different goals and objectives are connected on a commission basis — are how most companies are mediating relationships in ecosystems. The platform provides the core integration, application and management services for participants. For example, Outdoorsy connects camper owners with those looking to rent campers.
- Dimension 5: Form of Value Exchange: In addition to monetary-based value exchange, ecosystems may dynamically leverage information, reputation, services, and other non-monetary forms of value. For example, Boeing collaborated with 50 vendors to create the 777 aircraft. Ecosystems enable companies to exchange products and services for information or analytics. It’s important to understand the changing definition of “value” that ecosystems create.
- Dimension 6: Diversity of “Industries”: Ecosystem expansion can result in unexpected partnerships for organizations. Partners could include organizations within the primary industry, adjacent industries or, most unexpectedly, far-neighbor industries outside of the business’s industry (i.e., travel and healthcare).
- Dimension 7: Complexity of Multiple Ecosystems: Large organizations will most likely be involved in multiple ecosystems. The key is to understand how these ecosystems interact, identify potential fractures and overlaps, and acknowledge constraints and implications. Keep in mind that some overlapping ecosystems will create a new ecosystem, while other overlaps will highlight redundancy.
- Dimension 8: Technologies: Discussions about ecosystems can be overwhelming, but CIOs should keep in mind that they are responsible for the technology that will enable the business ecosystem strategy now and in the future. Leverage a digital business platform (i.e., open APIs, analytics, security capabilities, etc.) Success will require a strategic integration of technology, information and business processes. Organizations that do not work toward understanding their business ecosystems risk falling into a participatory role only, enabling other competitors or partners to take the leadership role and thus define the rules for engagement in that ecosystem. Specifically, CIOs must:
- Proactively reach out to collaborate with business counterparts on how and why to integrate ecosystems to improve the overall corporate strategy.
- Ensure any customer-, partner-, employee- or supplier-focused applications or solutions being developed today are at least considering these future business ecosystems
- Make sure to set aside development budget every year for the next five years for the most critical customer-, partner-, employee- or supplier-focused applications, solutions and supporting infrastructure to enable change to reflect evolving ecosystem strategies.
Business-Driven Development (BDD)
Business Activity Monitoring (BAM)
Business Application Programming Interface (BAPI)
Business Capability Modeling
Business Centric Methodology (BCM)
Business Continuity Management (BCM)
Business Continuity Plan (BCP)
Business Continuity Planning (BCP)
Business Driven Technology
Business Environment and Internal Control Factors (BEICF)
Business Function Model
Business IT Alignment
Business Impact Analysis (BIA)
Business Interruption Insurance
Business Life Cycle
Business Management System (BMS)
Business Model Innovation (BMI)
Business Model for Information Security (BMIS)
Business Motivation Model (BMM)
Business Oriented Architecture (BOA)
Corporate Social Responsibility (CSR)
Chief Executive Officer (CEO)
IT Strategy (Information Technology Strategy)
IT Sourcing (Information Technology Sourcing)
IT Operations (Information Technology Operations)