Blurring Sectoral Boundaries and the Rise of Business Ecosystems

Business ecosystem

“Successful businesses are those that evolve rapidly and effectively. Yet innovative businesses can’t evolve in a vacuum. They must attract resources of all sorts, drawing in capital, partners, suppliers, and customers to create cooperative networks. I suggest that a company be viewed not as a member of a single industry but as part of a ‘business ecosystem’ that crosses a variety of industries.”
~ Business Strategist James Moore in Harvard Business Review, 1993

Not too long ago, businesses operated within strict industry boundaries, rarely seeking cross-sectoral opportunities for growth. However, in today’s highly connected world, technology is enabling businesses to moving beyond traditional industry boundaries and coalesce into highly connected ecosystems that present an opportunity to create new value and drive powerful competitive advantage. Ecosystems bring together players from diverse industries to co-create solutions that fundamentally transform how companies serve customers and fulfill human needs.

Business Ecosystem Structure

According to Moore (1996), the business ecosystem is made up of customers, market intermediaries, companies selling complementary products, suppliers, and the company itself, which can be thought as the primary species of the ecosystem.

While Moore’s representation of the structure of a business ecosystem is relevant even today, there is room for extension of this framework to include an additional component that is vital to the success of the ecosystem. Modern day businesses inhabit ecosystems that are beyond the boundaries of their own industry – making cross-sectoral industry collaboration an essential aspect of the overall business ecosystem. For instance, the air travel industry could enhance end-to-end traveller experience by including diverse players from the car rental as well as hotel industry within its ecosystem.

Business Ecosystem Creation

The creation of a business ecosystem involves two foundational components. The first is the need to create value within the ecosystem in order to attract and retain stakeholders. The second is the need to share value with the stakeholders of the ecosystem. The first requirement usually involves the creation of a platform that offers products or services to others in the ecosystem. (Source: Marco Iansiti and Roy Levien, Harvard Business Review, 2004).

Airbnb, the world’s largest accommodation provider, is a good example of a business that effectively creates and shares value with its ecosystem. Airbnb creates value through a platform that connects travelers with potential hosts looking to rent out their spaces. While travelers get access to distinctive spaces and local experiences via the platform, hosts earn money by renting their spaces. For every booking, Airbnb charges a commission from both parties – travelers and hosts. Additionally, Airbnb shares the value it creates with the members of its ecosystem. It provides a verification process for every host and traveler on its platform to ensure safety of both parties. Through a network of freelance photographers, it provides free photo shoots to hosts for property listings. Hosts are also covered through a ‘Host Protection Insurance’ program, for incidents related to Airbnb stay or property damage. Besides that, an online reviews and ratings system helps establish transparency for both guests and hosts on the platform. Besides Airbnb, pioneering companies like Facebook, Alibaba, and Uber have leveraged the transformational power of business ecosystems to drive scale and success.

Business Ecosystem Sustenance

According to Iansiti and Levien (Harvard Business Review, 2004), 3 parameters are used to assess the health of a business ecosystem, as outlined below:

  1. Productivity: The ability to consistently transform technology and other raw materials of innovation into lower costs and new products/services
  2. Robustness: The ability to survive disruptions such as unforeseen technological change and market volatility
  3. Niche Creation: The ecosystem’s ability to create new, valuable functions and foster diversity that creates value

Businesses can increase ecosystem productivity by simplifying the complex task of connecting network stakeholders to one another or by making the creation of new products/services by third parties more efficient. Ecosystem robustness can be enhanced by consistently incorporating technological innovations, and niche creation can be encouraged by extending new products and services to a variety of third-party organizations, thereby growing the number of new stakeholders within the ecosystem community.

Additionally, businesses must constantly look at creating new value propositions to attract and retain members, while also extending the stakeholders within the ecosystem.

McKinsey predicts that over the next decade, learning to operate in a business world with disappearing borders will become a necessity for companies that want to be competitive. As traditional boundaries between industry sectors continue to blur, dominant ecosystems of the future will likely consist of networks of businesses that span several different industry verticals. Organizations that do not work towards adopting an ecosystem strategy risk falling behind and becoming obsolete. Firms that have successfully established business ecosystems must constantly look for ways to create new value and widen their stakeholder community to remain sustainable.

References:

1. Marco Iansiti and Roy Levien, Strategy as Ecology, Harvard Business Review, March 2004.
2. James F. Moore, Predators and Prey: A New Ecology of Competition, Harvard Business Review, May-June 1993.
3. James F. Moore, The Death of Competition: Leadership and Strategy in the Age of Business Ecosystems, 1997

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